Income Tax Appellate Tribunal - Delhi
Goodyear India Ltd. vs Income Tax Officer. (Asstt. Cit V. ... on 31 January, 2000
Equivalent citations: [2000]73ITD189(DELHI)
ORDER
B.M. Kothari, A.M. December, 1998
1. The cross appeals, one by the assessee and the other by the Revenue, are directed against the order dated 26th November, 1990 passed by the CIT(A) for asst. yr. 1986-87. Hence, both these appeals are disposed of by this common order.
2. We will first deal with Revenue's appeal.
3. The first ground raised by the Revenue is as follows :
"On the facts and in the circumstances of the case, the CIT(A) has erred in holding that disallowance under s. 40(c)/40A(5) of the IT Act in respect of perquisites provided to directors/employees are to be computed in accordance with r. 3 of the IT Rules and not by taking the actual expenditure incurred by the employer company."
4. The learned representative of both sides contended that this issue is covered in favour of the appellant by order, dated 20th July, 1997, in ITA No. 3125/Del/1990 and 3851/Del/1990 in assessee's own case for asst. yr. 1984-85. Respectfully following the aforesaid earlier order for asst. yr. 1984-85 of the Tribunal as well as the order of the Tribunal in assessee's case for asst. yr. 1982-83 and asst. yr. 1983-84 in ITA Nos. 2670/Del/1987 and 2869/Del/1987, we decide this issue in favour of the assessee and against the Revenue. Hence, Ground No. 1 of the Revenue's appeal is rejected.
5. Ground No. 2 raised by the Revenue is reproduced below :
"On the facts and in the circumstances of the case, the CIT(A) has erred in holding that the medical expenses of Rs. 2,479 will not constitute perquisite for the purpose of disallowance under s. 40(c) of the IT Act."
6. The learned representative of both sides admitted that this issue is also covered in favour of the assessee by an order of the Tribunal in assessee's case for asst. yr. 1984-85 (supra). The Tribunal in asst. yr. 1984-85 decided the said issue in favour of the assessee by following the judgment of Hon'ble apex Court in CIT vs. Mafatlal Gangabhai & Co. (P) Ltd. (1996) 219 ITR 644 (SC) and the judgment of the Jurisdictional High Court in CIT vs. Lala Shri Dhar (1972) 84 ITR 192 (Del). Respectfully following the aforesaid decisions, we decide this issue also in favour of the assessee and against the Revenue. Hence, Ground No. 2 of Revenue's appeal is also rejected.
7. Ground No. 3 raised by the Revenue is reproduced below :
"On the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition of Rs. 1 lac out of travelling expenses on account of unverified expenses."
8. The learned representatives of both sides admitted that his issue is also covered in favour of the assessee by the above referred order of the Tribunal in assessee's case for asst. yr. 1984-85 and further pointed that Ground No. 4 raised by the assessee in their appeal is also connected with the same point. It will, therefore be relevant here to be reproduce Ground Nos. 4(a) and (b) of assessee's appeal so that the said Ground Nos. 4(a) and (b) of assessee's appeal may also be decided along with the aforesaid Ground No. 3 of Revenue's appeal :
9. Ground Nos. 4(a) and (b) of assessee's appeal :
4(a) That the learned CIT(A) erred on facts and in law, not to hold that no disallowance could be made in respect of travelling expense purportedly under r. 6D of the IT Rules, 1962.
(b) Without prejudice to the Ground of Appeal No. 4(a) above, the learned CIT(A) erred on facts and in law, to uphold the disallowance of a sum of Rs. 1,00,000 under r. 6D of the IT Rules, 1962 on the basis of surmises and conjectures unsupported by any evidence."
10. The learned counsel for the assessee submitted that Ground No. 4(a) of the assessee's appeal is not pressed. As regards Ground No. 4(b), it was stated that in appellant's own case for asst. yr. 1984-85, the Tribunal had deleted the ad hoc disallowance under r. 6D of the IT Rules following the earlier order of the Tribunal. It was, therefore, urged that the ad hoc disallowance of a sum of Rs. one lakh under r. 6D sustained by the CIT(A) should also be deleted.
11. We have considered the submissions made by the learned representatives of the parties and have perused the orders of the learned Departmental authorities. The AO observed in para 10 of the assessment order that the assessee claimed total expenses under the head "Travelling expenses" at Rs. 63,26,854 including expenses incurred for foreign travel. The assessee filed working sheet under r. 6D vide Annexure 'C' of Tax Audit Report, according to which disallowance has been worked out at Rs. 3,15,608. The AO observed that position regarding deficiency in respect of supporting documents prevailed in the year under consideration is the same as in the previous year. He, therefore, disallowed a sum of Rs. one lakh on account of non-verification of claim and further disallowance of Rs. one lakh was made for non-verification of working of r. 6D. Thus, a further disallowance of Rs. 2 lakhs in addition to the disallowance of Rs. 3,15,608 worked out by the assessee was made.
12. The CIT(A) vide para 6 on pp. 19 to 21 of the order deleted the disallowance of Rs. one lakh made on account of non-verification of claim but confirmed the disallowance of Rs. one lakh made on account of lack of complete details for verification of the quantum of disallowance under r. 6D.
13. The Tribunal in assessee's case for asst. yr. 1984-85 vide para 10 at p. 16 of its order, deleted the disallowance of Rs. one lakh made under r. 6D, which was sustained by the CIT(A) in asst. yr. 1984-85 also on the ground that the assessee did not furnish complete details regarding working of r. 6D. The Tribunal while deleting the said disallowance of Rs. one lakh confirmed by the CIT(A) for asst. yr. 1984-85 observed that the Tribunal has deleted similar disallowance in assessee's case for asst. yrs. 1982-83 and 1983-84 also. The Tribunal in Revenue's appeal relating to the relief of Rs. one lakh granted by the CIT(A) in asst. yr. 1984-85 has dismissed the similar ground. The learned representative of both sides admitted that the facts relating to the year under consideration are similar as in the asst. yr. 1984-85. The AO made the disallowances on the basis of reasons given in assessment order for asst. yr. 1984-85. We, therefore, respectfully following the order of the Tribunal in assessee's case for asst. yr. 1984-85, delete the ad hoc disallowance of Rs. one lakh sustained by the CIT(A) on account of lack of complete details for verification of the quantum of disallowance under r. 6D and also confirmed the deletion by the CIT(A) of the separate disallowance of Rs. 1 lakh made by the AO on account of non-verification of the claim.
14. In view of the aforesaid discussions, Ground No. 4(a) of the assessee's appeal is rejected as not pressed and Ground No. 4(b) of assessee's appeal is allowed. Ground No. 3 of Revenue's appeal is rejected.
15. Ground No. 4 raised by the Revenue is reproduced hereunder :
"On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 57,07,285 in respect of increase in the value of closing stock on account of excise duties payable on the manufactured goods."
16. It was the common contention of the learned representatives of both sides that this ground is also covered in favour of the assessee by a decision of the Tribunal in assessee's own case for asst. yr. 1985-86 in ITA Nos. 7860 and 7829/Del/1990 vide order dated 28th September, 1998.
17. It was contended on behalf of the assessee that the appellant has consistently been valuing closing stock of uncleared goods lying in the factory without including excise duty payable thereon in future on removal of such goods. The aforesaid system of valuation of stock followed by the assessee consistently over the years has been accepted by the Revenue and such system was disturbed by them from asst. yr. 1985-86. Similar addition made by the Revenue in asst. yr. 1985-86 has been deleted by the Tribunal in asst. yr. 1985-86. The Tribunal in its order, dated 28th September, 1998, vide para 88 of their order has given the following findings :
"We have considered the rival submissions, perused the record and looked into the relevant documents to which our attention was drawn. We have also gone through the case laws as cited by the counsel for the assessee and are of the considered view that since duty has not been paid at all, there was no point in valuing closing stock of uncleared goods lying in the factory by including excise duty where excise duty is a future event which takes place on removal of goods from the factory when cleared. Since system of valuation of stock without including excise duty payable thereon is being consistently followed by the assessee and being accepted by the Revenue, we see no point in making such addition. We also find that this plea of the assessee's representative that if AO is to change the method of valuation of closing stock the opening stock for the year under consideration needs to be valued on the same basis and for this proposition assessee's counsel has taken support from K. G. Khosla & Co. vs. CIT (1975) 99 ITR 574 (Del). Keeping in view all the facts and circumstances, we are of the considered opinion that order of CIT(A) is fully justified and needs no interference at our hands. While confirming his order, we dismiss this ground of appeal of the Revenue."
18. Respectfully following the aforesaid order of the Tribunal in assessee's own case for asst. yr. 1985-86, we hold that the CIT(A) has rightly deleted the said addition of Rs. 57,07,285 made in respect of increase in value of the closing stock of uncleared goods lying in the factory by including the amount of excise duty payable thereon in future on removal of such manufactured goods. We would, however, like to observe that if the assessee has claimed increase in the value of opening stock of next year in asst. yr. 1987-88 on the basis of the aforesaid addition made by the AO in asst. yr. 1986-87 and if any such adjustment had been allowed in the next year, the same shall be withdrawn for asst. yr. 1987-88. With these observations, the Ground No. 4 raised by the Revenue is also rejected.
19. Now, we will deal with the assessee's appeal. Before dealing with the main Ground No. 1 raised in assessee's appeal, we would like to first dispose of the remaining grounds of the assessee's appeal.
20. Ground No. 2 raised by the assessee is reproduced below :
"That the learned CIT(A) erred on facts and in law, to uphold the disallowance of a sum of Rs. 1,85,088 by the ITO out of revenue expenditure incurred by the appellant towards repairs to building."
21. A perusal of the relevant para 4.1 of the order passed by the CIT(A) as well as a chart submitted by the learned counsel of the assessee at the time of hearing shows that the CIT(A) has confirmed the expenditure on following items out of building repair, by holding the same as capital expenditure which aggregates to Rs. 1,42,047 only and not Rs. 1,85,088 mentioned in the aforesaid ground :
Rs.
(i) Construction of thick wall in Locker Room 19,366 (ii) Opening of wall, fixing wood panels window frames, etc. 12,234 (iii)Electrical fittings with accessories 19,938 (iv) Construction of wall around coal shed 19,217 (v) Construction of road near shipping platform 60,538 (vi) Charges for electrical jobs for new pan inspection area-laying of power-cable, earth wire, floor main connections, fixing of various electrical accessories fixing MS box, making trenches and refilling the same, laying of conduit pipes, etc. (bill not available) 10,754 ---------- Total 1,42,047 ----------
22. The learned counsel for the assessee was fair enough to conceive that expenses incurred for construction of road near shipping platform amounting to Rs. 60,538 relates to construction of new road in the factory premises and, therefore, the same has rightly been treated as capital expenditure. In view of the said concession made by the learned counsel for the assessee, the disallowance to the extent of Rs. 60,538 confirmed by the CIT(A) is upheld. However, the ITO should allow depreciation on the cost of the road in accordance with the provisions of law.
23. As regards other items of dissallowances confirmed by the CIT(A) out of building repairs, the learned counsel for the assessee invited our attention towards various documents submitted in the compilation. For example, he drew our attention to copy of Bill dated 15th July, 1984 of M/s Mathura Lal Chaddha & Co. showing that payments were made to them for certain alterations of Locker Room. The Locker Room was already in existence, no new Locker Room was constructed. Only a thick wall was provided. Likewise, bills for expenses incurred on opening of wall, fixing wood panels, window frame, etc. are also in the nature of repair and replacement. The learned counsel thus contended that all the remaining items of disallowances out of building repair represent current repairs which is allowable as a revenue expenditure.
24. The learned Senior Departmental Representative relied upon the reasons mentioned in the order of the CIT(A) as well as the assessment order.
25. On a careful consideration of the entire relevant facts and keeping in view the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC), we are of the view that disallowance made in respect of remaining items mentioned above should be deleted. The assessee, therefore, gets a relief of Rs. 71,509 (Rs. 1,42,047 - Rs. 60,538). The balance amount of disallowance is confirmed.
26. Ground No. 3 raised in the assessee's appeal is as follows :
"That the learned CIT(A) erred, on facts and in law not to allow deduction of a sum of Rs. 1,73,15,903 in terms of s. 43B of the Act in respect of excise duty embedded in the value of closing stock as of 31st December, 1985. Further the learned CIT erroneously confirmed addition of Rs. 45,22,814 by ITO on account of difference in excise duty of opening and closing stocks embedded in the stocks."
27. The learned representatives of both sides contended that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for asst. yrs. 1984-85 and 1985-86 as well as by the decision of the Special Bench of the Tribunal in the case of Indian Communication Network (P) Ltd. vs. IAC (1994) 48 TTJ (Del) 604 (SC) : (1994) 49 ITD 56 (Del) (SB).
28. The learned Departmental Representative relied upon the reasons mentioned in the assessment order and the order of the CIT(A).
29. After considering the submissions made by the learned representatives and after going through the above referred order of the Tribunal, we find that the aforesaid grounds is covered in favour of the assessee by the earlier decisions of the Tribunal in assessee's own case for asst. yrs. (1984-85 and 1985-86 and also by the decision of Special Bench in Indian Communication Network (P) Ltd. case (supra). The AO is, therefore, directed to grant appropriate relief in accordance with the detailed finding given by the Tribunal is assessee's case for asst. yrs. 1984-85 and 1985-86. While granting the relief in respect of the amount of excise duty, actually paid by the assessee in the year under consideration, in view of s. 43B, the AO should also reduce the value of the opening stock of next year for computing the taxable income of next year so as to ensure that the appellant does not avail of double deduction in respect of the same amount. The AO will also have to reduce the value of opening stock of the year under consideration by the amount of excise duty paid and embedded in the value of the closing stock as on 31st December, 1984, in which the deduction had been allowed to the assessee in asst. yr. 1985-86 by the Tribunal following the decision of the Special Bench in Indian Communication Network (P) Ltd.'s case (supra). The AO is directed to compute the amount of relief accordingly.
30. Ground No. 4 of the assessee's appeal has already been disposed of while dealing with the Revenue's appeal.
31. In Ground No. 5, the assessee has challenged the confirmation of disallowance of Rs. 13,200 in respect of legal expenses incurred by the assessee for defending a penalty case relating to sales-tax.
32. The learned counsel contended that the expenses incurred for protecting the business assets and for defending the action initiated in the course of running the business is clearly allowable. He placed reliance on judgments CIT vs. Birla Cotton Spg. & Wvg. Mills Ltd. (1971) 82 ITR 166 (SC), South Asia Industries (P) Ltd. vs. CIT (1981) 132 ITR 144 (Del) and South Asia Industries (P) Ltd. vs. CIT (1985) 155 ITR 392 (Del). The legal expenses incurred for contesting penalty case relating to sales-tax cannot be treated as having been incurred in connection with infringement of law.
33. The learned Departmental Representative relied upon the facts and reasons discussed in the order of the CIT(A).
34. After considering the submissions made by the learned representatives and after going through the above referred decisions, we are of the view that expenditure in question has been incurred for business purposes and is clearly allowable under the Act. The AO is directed to allow the same.
35. Ground No. 6 directed against initiation of penalty proceedings under s. 271(1)(c) was not pressed by the learned counsel. Hence, the same is rejected, as not pressed.
36. As regards Ground No. 7 relating to levy of interest under s. 139(8) and s. 215, the AO is directed to grant consequential relief.
37. Now we will consider the main Ground Nos. 1a and 1b which are produced hereunder :
"1a. That the learned CIT(A)erred, on facts and in law, not to hold the expenditure of Rs. 16,42,205 as revenue expenditure-being the consideration paid to Goodyear Tyre & Rubber Company, Akron, Ohio for technical know-how and drawings and designs for manufacture of radial passenger tyres.
1b. Without prejudice to Ground of Appeal (1)(a) above, the learned CIT(A) erred not to allow depreciation, tripple shift allowance, and investment allowance on the sum of Rs. 16,42,205 held to be capital expenditure.
38. The assessee claimed deduction of a sum of Rs. 16,42,205 being the rupee equivalent of US $ 96,000 which was paid to M/s Goodyear Tyre & Rubber Co., Akron, Ohio as technical know-how fees for manufacturing of radial passenger tyres in accordance with technical agreement dated 1st December, 1984 executed with the said foreign company, after obtaining necessary approval from the Ministry of Industries, Department of Industrial Development, Government of India and also from Reserve Bank of India. The assessee was also required to pay royalty @ 2 per cent on net ex-factory sales price of the product for a period of 5 years beginning with the commencement of commercial production of the commercial products, in addition to the aforesaid lump sum amount of U.S. $ 96,000. The AO observed that the assessee has acquired benefit of enduring nature in terms of the said agreement for manufacture of radial tyres, the production of which had not been started in the year under consideration. The AO, therefore, rejected the assessee's claim for treating the said lump sum payment of Rs. 16,42,205 as revenue expenditure. The AO treated the same as capital expenditure. An alternative plea was also made before AO that in case it is not treated as a revenue expenditure, 1/6th of the technical know-how fees should be allowed as a deduction under s. 35AB of the Act. The AO observed that the assessee has paid only Rs. 3,19,768 being the first instalment in the year 1985. He accordingly allowed deduction of 1/6th of the said amount i.e. Rs. 64,961. The CIT(A) examined the various clauses of the technical know-how agreement dated 1st December, 1984 executed between the foreign company and the appellant company in para 2.2 of the order. After considering the entire relevant facts, the CIT(A) observed that the assessee has obtained a technical knowledge, know-how, designs, formulas which have been given to the appellant-company, the benefit of permanent and enduring nature. He further observed that it is essential to take note of the fact that apart from the lump sum payment, the appellant has to pay royalty @ 2 per cent for the period of 5 years beginning with the commencement of production of radial tyres. The appellant-company has thus obtained the assets in the shape of technical information, drawings, designs, formulas which has been used by the appellant-company for manufacture of radial tyres. The CIT(A) relied upon the judgment of Hon'ble Supreme Court in the case of Scientific Engg. House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC). He also observed that such technical know-how was obtained for manufacture of radial tyres which was an additional product of the manufacturing unit. The learned CIT(A) confirmed to action of the AO of treating the said sum of Rs. 16,42,205 as an expenditure of capital nature. The alternative claim of the assessee for grant of depreciation, tripple shift allowance and investment allowance was also denied by the CIT(A) on the ground that the AO has already allowed deduction under s. 35AB of the Act.
39. Shri Ajay Vohra, the learned counsel submitted that under the agreement, the appellant only acquired the right to use the technical knowledge to manufacture new product in the same line of business and hence, the consideration paid therefor is allowable deduction. He submitted that such payment has neither resulted in any advantage of enduring benefit in the capital field nor has resulted in creation/acquisition of any assets. He placed reliance on the following decisions to support his claim for deduction of the said amount as revenue expenditure :
(i) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC);
(ii) Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del);
(iii) Triveni Engg. Works Ltd. vs. CIT (1982) 136 ITR 340 (Del);
(iv) Addl. CIT vs. Sharma Engine Valves Ltd. (1982) 138 ITR 216 (Del);
(v) CIT vs. Bhai Sunder Dass & Sons (P) Ltd. (1986) 158 ITR 195 (Del);
(vi) CIT vs. British India Corpn. Ltd. (1987) 165 ITR 51 (SC);
(vii) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC);
(viii) CIT vs. Avery India Ltd. (1994) 207 ITR 813 (Cal);
(ix) Bajaj Tempo Ltd. vs. CIT (1994) 207 ITR 1017 (Bom);
(x) CIT vs. Madras Rubber Factory Ltd. (1995) 212 ITR 443 (Mad);
(xi) CIT vs. Suhrid Geigy Ltd.; and
(xii) CIT vs. Madras Rubber Factory Ltd. (1983) 144 ITR 678 (Mad).
40. Shri Vohra, the learned counsel submitted that the CIT(A) has wrongly applied the ratio in the case Scientific Engg. House (P) Ltd. (supra). The only question decided by the Hon'ble Supreme Court in that case was whether depreciation was available on technical know-how treating the same as plant. In that case, the assessee never claimed expenses on technical know-how as revenue expenses. Therefore, the Hon'ble apex Court did not deal with deductibility of such expenditure as revenue expenditure. He further invited our attention towards the judgment of the Hon'ble Bombay High Court in the case of Bajaj Tempo Ltd. (supra) where the Hon'ble Bombay High Court while referring to the decision of the Supreme Court in Scientific Engg. House (P) Ltd. (supra) observed that the arguments before the Supreme Court did not appear to have turned on the issue as to whether the payment made for acquiring such documents really amounted to capital expenditure. It was also pointed out on the strength of judgment of Bombay High Court in Kirloskar Pneumatic Co. Ltd. vs. CIT (1982) 136 ITR 746 (Bom) that it is not possible to scan a contract in bits and pieces to determine its nature, nor by referring to a particular clause. The predominant intention has to be ascertained by taking an overall view of the agreement.
41. The learned counsel also placed reliance on the following two decisions of Tribunal in which such expenditure was allowed as revenue expenditure :
(1) IAC vs. Rollatainers Ltd. (1988) 30 TTJ (Del) 59 : (1987) 23 ITD 440 (Del); and (2) IAC vs. Bajaj Tempo Ltd. (1996) 55 TTJ (Pune)(SB) 43 : (1996) 218 ITR (AT) 147 (Pune)(SB).
42. The learned counsel also placed reliance on the decision of the Tribunal in assessee's own case of asst. yr. 1984-85 in which the Tribunal, on identical facts, has held that payment of technical know-how fees for manufacture of extra large OTR tyres is allowable as revenue expenditure. It was held that the consideration was paid for the betterment of the product in question and the assessee has only enlarged the range of existing product. The learned counsel submitted that the only difference between the facts of asst. yr. 1984-85 and the year under consideration, namely, asst. yr. 1986-87 is that the provisions of s. 35AB have been inserted w.e.f. 1st April, 1986 and is applicable from asst. yr. 1986-87 and onwards.
43. The learned counsel pointed out that s. 35AB is intended to enable amortization of expenses on acquisition of know-how. The said section does not cover a case where there is only a right to use the technical know-how without any acquisition of the title over the same. He placed strong reliance on the decision of Calcutta Bench of Tribunal in the case of Wellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal). He submitted that the facts of the present case are similar to that case. The Calcutta Bench has considered the impact, scope and legislative purposes of enacting s. 35AB at considerable length. He, therefore, submitted that the said decision should be followed in the present case also.
44. The learned counsel further invited our attention towards a recent judgment of the Hon'ble Bombay High Court in the case of CIT vs. Kirloskar Tractors Ltd. (1998) 98 Taxman 112 (Bom). In that case, the assessee entered into technical collaboration agreement with German firm to obtain know-how for manufacturing tractors and engines. As per the said agreement, the assessee had right only to use know-how but could not assign, encumber, let or sub-lease that right. The assessee was obliged to keep technical document secret and not to divulge any information to others. The technical know-how continued to be the property of the supplier. On these facts, the Hon'ble Bombay High Court held that since the assessee obtained only right to use know-how and did not acquire any title, expenditure incurred for getting know-how was allowable as revenue expenditure. The years under consideration were asst. yrs. 1974-75 and 1975-76 i.e., prior to introduction of s. 35AB.
45. The learned counsel thus strongly urged that the deduction of Rs. 16,42,205 should be allowed as revenue expenditure.
46. The learned counsel was fair enough to state that Ground No. 1(b) relating to alternative prayer of allowing depreciation, tripple shift and investment allowance on the sum of Rs. 16,42,205 held to be capital expenditure will not survive in view of s. 35AB. He submitted that if it is a revenue expenditure, it is fully allowable under s. 37(1). If it is capital expenditure, 1/6th by way of amortization is allowable under s. 35AB.
47. The learned Senior Departmental Representative supported the order of the CIT(A) as well as the AO. He drew our attention towards a recent judgment of the Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 224 ITR 342 (SC). He submitted that all the earlier cases relied upon by the learned counsel have been considered by the Hon'ble Supreme Court in this latest judgment. The facts of this latest judgment indicate that the assessee in that case had obtained a completely new plant with a complete new process and completely new technology for manufacture of the product. In the present case also, the assessee has obtained know-how for manufacture of entirely new product, namely, radial tyres, which was hitherto not being manufactured by the assessee. The assessee had been manufacturing only OTR tyres. The Supreme Court also laid emphasis on whether on expiry of the period of agreement, the assessee is required to give back the plans and designs which were obtained. In the present case, the assessee is not required to return the plans and designs in the event of termination of the agreement. He submitted that the agreement in question, if analysed in the light of the principles laid down by the Hon'ble Supreme Court in the aforesaid case, it will be found that assessee derived benefit in the capital field. He submitted that the said agreement clearly uses the expression that the foreign company "transfers such technology" to the appellant company. The assessee continued to hold the know-how even after termination of the agreement as per cl. 7. The assessee is required to separately pay royalty on the net sale price as per details mentioned in cl. 4 of the said agreement. He, therefore, strongly argued that the cumulative effect on proper consideration of the various terms and conditions of the agreement, will lead to the conclusion that the CIT(A) has rightly treated it as capital expenditure.
48. Mr Goyal, the learned Departmental Representative thereafter submitted that the various decisions relied upon by the learned counsel for the assessee do not support the assessee's claim in any manner. It was pointed out that the judgment in Ciba of India Ltd.'s case (supra) has been considered by the Hon'ble Supreme Court in the latest judgment of Janas Woodhead & Sons (India) Ltd.'s case (supra). The facts of judgment of Hon'ble Delhi High Court in Shriram Refrigeration Industries Ltd.'s case (supra) are clearly distinguishable. In that case, there was no manufacture of any new product. The ownership remained with the foreign company and they never transferred the technical know-how to the Indian company. In the judgment of Hon'ble Delhi High Court in Triveni Engineering Works Ltd. vs. CIT (supra) cl. 8 of the agreement clearly provides that copies of drawings, designs etc. shall remain vested in the foreign company. The facts of Judgment of the Hon'ble High Court in Shama Engine Valves Ltd.'s case (supra) are also different. In the said case both the parties agreed that lump sum payment was of capital nature. The dispute only related to deduction of the recurring payment of royalty made by the assessee. The facts of the decision Tribunal, Delhi Rollatainers Ltd.'s case (supra) is also distinguishable as cl. 18 of the agreement in that case clearly provided that the licensee shall immediately return back of the material upon termination of the agreement, while no such clause exists in the present agreement. The learned Senior Departmental Representative further submitted that facts of the decision of Tribunal Special Bench in Bajaj Tempo Ltd.'s case (supra) are also distinguishable. In that case also, the technical data were required to be returned on the expiry of the agreement. Moreover, the Special Bench sitting the Maharashtra had to follow the binding judgment of the Hon'ble Bombay High Court in CIT vs. Tata Engg. & Locomotive Co. (P) Ltd. (1980) 123 ITR 538 (Bom), as already observed by the Special Bench in Bajaj Tempo Ltd.'s case (supra). The Special Bench while following the binding judgment of Hon'ble Bombay High Court dissented from the judgment of Hon'ble Madras High Court in Fenner Woodroffe & Co. Ltd. vs. CIT (1976) 102 ITR 665 (Mad). The learned Senior Departmental Representative submitted that the Madras judgment has been approved by the Hon'ble Supreme Court in the latest judgment in Jonas Woodhead & Sons (India) Ltd.'s case (supra). Thus, the judgment of Bombay High Court and the decision of Special Bench following the same stands impliedly overruled. The learned Senior Departmental Representative thus very ably tried to distinguish the facts of the various judgments relied upon by Mr. Vohra.
49. The learned Senior Departmental Representative submitted that the decision of the Tribunal in assessee's own case for asst. yr. 1984-85 is also clearly distinguishable on facts. In that year, the agreement with the foreign company was made for acquiring the package which is different than the present agreement.
50. Mr. Goyal, the learned Senior Departmental Representative submitted that the Calcutta Bench of the Tribunal has held that s. 35AB applies only in relation to expenditure incurred for acquisition of know-how of a capital nature. This decision is against the Department so far as interpretation of s. 35AB is concerned. But such an interpretation of s. 35AB is contrary to the interpretation based on a plain language of the relevant section. It is well settled law that where the language of the provisions is clear, the literal interpretation has to be applied. Reliance was placed on judgment of Smt. Tarulata Shyam vs. CIT (1977) 108 ITR 345 (SC). It was pointed out by Mr. Goyal that s. 35AB is a specific provision relating to allowability of expenditure incurred by way of lump-sum consideration for acquiring any know-how for use for the purposes of assessee's business. There are only 3 conditions :
(a) payment should be made for acquiring any know-how;
(b) any lump sum consideration for acquiring any know-know; and
(c) such know-how has been acquired for use for the purposes of assessee's business.
51. The said section nowhere provides that only capital expenditure incurred for acquiring any know-how will come within the ambit of s. 35AB. Sec. 37 is a general provision. Sec. 35AB being a special and specific provision relating to lump sum consideration for acquiring know-how, it will override the general provision of s. 37(1). The learned Senior Departmental Representative also contended that facts of decision of Calcutta Bench of Tribunal are distinguishable on facts. He thus strongly supported the order of the CIT(A).
52. In the Rejoinder, Shri Vohra, the learned counsel submitted that the facts of the case of Jonas Woodhead & Sons (India) Ltd. (supra) are different. The apex Court has not overruled or upset the earlier decisions but all those earlier judgments have been cited with the approval in the latest judgment. In that case, the Revenue itself had allowed 75 per cent of the sum paid as royalty to the English company as revenue expenditure and the dispute related to disallowance of only 25 per cent of the sum paid to the English company, which was held as capital expenditure. He submitted that in that case under the agreement with the foreign firm, what was set-up by the assessee was a new business and the foreign firm had not only finished information and the technical know-how but rendered valuable services in the setting-up of the factory itself. In the present case, the know-how obtained for manufacture of radial tyres was not a new business but it was in the same line of existing business. The appellant company did not require any new plant or machinery for manufacture of radial tyres. It only needs a change in the chemical composition. The Tribunal in assessee's own case in asst. yr. 1984-85 has duly considered the said judgment of the Hon'ble Supreme Court in Jonas Woodhead & Sons (India) Ltd.'s case (supra). The Bombay High Court in the recent case of Kirloskar Tractors Ltd. (supra) has also considered the said judgment of the Hon'ble apex Court. After considering the said judgment, it has been held that payment for acquiring only the use of know-how is clearly allowable as a revenue expenditure. The terms "transfer of technology" used in the agreement is subject to the various terms and clauses of the said agreement. The agreement provides for various restrictive clauses such as confidentiality and secrecy clause prohibiting user of the technology by the assessee upon termination, prohibition of sub-letting without consent of the foreign company, etc. This clearly proves that the assessee has not acquired only title or ownership over the technical know-how and, therefore, the said amount is clearly allowable as revenue expenditure. The learned counsel further submitted that the judgment of Hon'ble Delhi High Court in Triveni Engg. Works Ltd.'s case (supra) clearly reveals that there was no provision in the agreement for return of documents, etc. in that case also. That Hon'ble Court analysed the agreement fully and held that expenditure is allowable as revenue expenditure. In the case of Triveni Engg. Works Ltd.'s case (supra), lump sum payment for technical know-how relating to altogether a new product was held to be allowable. In the present case, radial tyre is within the range of existing business of the assessee. Shri Vohra further pointed out that the Madras High Court's judgment dissented by the Special Bench in Bajaj Tempo Ltd.'s case (supra) was the case of Fenner Woodroffe & Co. Ltd.'s case (supra). This judgment of Hon'ble Madras High Court has not even been cited before the Hon'ble Supreme Court in the judgment reported in 224 ITR 342. Some other judgment in the case of CIT vs. Sarda Binding Works (1976) 102 ITR 187 (Mad) was referred to. The contention of the learned Senior Departmental Representative that Madras view has been approved by the Hon'ble Supreme Court in the latest judgment which impliedly overrules the Special Bench decision, is therefore, patently wrong.
53. The learned counsel further submitted that the expression "acquire" means acquiring some asset as owner thereof. The Calcutta Bench in the decision in Wellman Incandescent India Ltd.'s case (supra) has examined the object and scope of s. 35AB and has rightly held that the same relates only to capital expenditure incurred for acquiring know-how. He also referred to a Circular No. 56, dated 19th March, 1971 relating to s. 35D to butress his view-point. The learned counsel also drew our attention towards definition of "Rent" given in Expln. to s. 194-I(1) which gives a wide meaning of the expression rent and has been made applicable in relation to rental income derived from any property whether owned by the assessee or taken under lease, sub-lease or tenancy, etc. He submitted that wherever legislature wanted to specifically extend the meaning of any expression beyond its natural meaning, it has been expressly so provided in the relevant statutory provision. The learned counsel thus strongly urged that the expenditure should be allowed as revenue expenditure.
54. We have carefully considered the submissions made by the learned representatives and have also gone through all the judgments cited by them. We have also carefully gone through all the relevant documents submitted in the compilation to which our attention was drawn during the course of hearing and also the orders of the learned Departmental Authorities. We have given our very thoughtful consideration to the submissions made.
55. It may be imperative to first examine the ambit and scope of s. 35AB inserted by the Finance Act, 1985 w.e.f. 1st April, 1986 which has been made applicable from asst. yr. 1986-87. The provisions of s. 35AB(1), as it existed in the relevant year, is reproduced hereunder :
"35AB(1) Subject to the provisions of sub-s. (2), where the assessee has paid in any previous year any lump-sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years."
56. The Tribunal, Calcutta Bench 'C' in the case of Wellman Incandescent India Ltd. (supra) has held as under :
"Prior to introduction of s. 35AB, the consideration paid for acquiring any know-how for the purpose of business was held to be capital expenditure, not allowable as deduction under s. 37(1). The consensus of judicial opinion was that expenditure for acquiring the technical know-how was different from expenditure incurred for obtaining the mere use of the technical know-how and information which was allowable as revenue expenditure. Thus, prior to the introduction of s. 35AB, the law was that payment for acquisition of the technical know-how or information would be capital payments and payments for the mere use of such know-how during the currency of the agreement were revenue payments, deductible while computing the business income. Having regard to the state of law which existed prior to the introduction of s. 35AB it must be construed that the legislature wanted to provide for writing off of even payments made for the acquisition of technical know-how despite the fact that the judicial interpretation was not in favour of such view. The write-off however, to be spread over a period of six assessment years. The only condition imposed by s. 35AB is that the consideration for acquiring the know-how should be acquired for use for the purpose of the assessee's business.
The assessee's right to have the payments made for obtaining the use of the technical know-how allowed as revenue expenditure remains unaffected by the new s. 35AB. Sec. 35AB comes into play only when the consideration is paid for acquiring the know-how."
57. Mr. Goyal, the learned Senior Departmental Representative had vehemently contended that a clear interpretation based on the language of the aforesaid provision nowhere indicates that s. 35AB applies only in relation to expenditure incurred for acquiring technical know-how in the capital field. It does not in any manner suggests that it applies only in cases where such lump sum payment made for acquiring technical know-how constitute capital expenditure. He also placed reliance on judgment of Hon'ble Supreme Court in the case of Smt. Tarulata Shyam & Ors. vs. CIT (supra) to support his contention that where any of the statutory provision is clear and unambiguous, the literal interpretation has to be applied. He submitted that s. 35AB is a specific provision dealing with allowability of any lump sum consideration for acquiring any know-how for the use for the purposes of business. The use of word 'any' at these two places in s. 35AB(1) clearly shows that it will apply to any lump sum payment made for acquiring any know-how regardless of the fact whether it is in the nature of capital expenditure or revenue expenditure. He also submitted that such a special provision dealing with allowability of expenditure on know-how will prevail over general provisions contained in s. 37(1). In order to appreciate this contention of the learned Senior Departmental Representative we will also examine the language of few other sections of the Act. Sec. 35A which deals with allowability of expenditure on acquisition of patent rights or copyrights clearly provides that in respect of any capital expenditure of a capital nature incurred after 28th February, 1966, on the acquisition of patent rights or copyrights used for the purposes of the business, a deduction equal to the appropriate fraction of the amount of such expenditure, shall be allowed in accordance with s. 35A. Likewise, s. 35BB also clearly provides that in respect of any expenditure, being in the nature of capital expenditure incurred for acquiring any right to operate telecommunication services, shall be allowed as deduction equal to the appropriate fraction of the amount of such expenditure in accordance with the provisions of the amount of such expenditure in accordance with the provisions of the said section. These provisions provide for grant of deduction for capital expenditure incurred on the acquisition of patent rights or copyrights or for acquiring any right to operate telecommunication services, etc. The expression "capital expenditure" has also been specifically used in these provisions along with the words expenditure incurred for acquisition of patent rights, etc. However, in s. 35AB, the "expression of capital nature" has not been specifically used. It only says that "any lump sum consideration for acquiring any know-how for use for the purposes of his business" shall be allowed as deduction @ 1/6th per year. The absence of the words "expenditure of a capital nature" in s. 35AB, as has been used in s. 35A and 35ABB gives a prima facie impression that the contention of the learned Senior Departmental Representative requires a serious application of mind on this interesting and difficult point raised by him.
58. It may also be relevant here to examine the various other provisions in order to decide whether s. 35AB covers within its ambit only the capital expenditure incurred for acquiring know-how or it includes any kind of consideration paid for acquiring know-how regardless of the fact whether it is of revenue nature or capital nature and whether s. 35AB overrides the provision of s. 37(1) under which the expenditure of revenue nature incurred for acquiring technical know-how for use in assessee's business is wholly allowable. Sec. 37(2B) provides that "notwithstanding contained in sub-s. (1)", no allowances shall be made in respect of expenditure incurred by an assessee on certain advertisements. The allowability of expenses on advertisement was subjected to certain ceilings and limits. Likewise, s. 37(3A) and (3B) as it existed in the asst. yrs. 1984-85 and 1985-86 provides that notwithstanding anything contained in sub-s. (1), expenditure incurred on advertisements, publicity, sales promotion, running and maintenance of aircrafts and motorcars, payments made to hotels in excess of Rs. 1 lakh shall be subjected to disallowance @ 20 per cent on the aggregate expenditure incurred on these heads of expenditure in excess of Rs. 1 lakh.
59. It may also be worthwhile to refer to ss. 40, 40A and 43B of the Act which provides that notwithstanding anything to the contrary contained in any other provisions of the Act, certain expenditure which are otherwise allowable under s. 37(1) will not be allowed or their allowability will depend on the fulfilment of the conditions prescribed in these prohibitive provisions. It is clear from these provisions that wherever legislature wanted to restrict the allowability of an expenditure, which is otherwise allowable under s. 37(1), a non obstante clause such as "notwithstanding anything contrary contained in any other provisions of this Act" or "notwithstanding anything contained in sub-s. (1) of s. 37" have been specifically added in such restrictive and prohibitive sections. No such non obstante clause has been used in s. 35AB of the Act. Sec. 35AB is a enabling provision which provides for grant of deduction in respect of any lump-sum consideration paid for acquiring any know-how for the purposes of assessee's business. It does not contain any restrictions nor it imposes any conditions in relation to an expenditure incurred for acquiring any know-how for the purposes of business, which is allowable as revenue expenditure under s. 37(1).
60. It may be useful to refer to the judgment of the Hon'ble Supreme Court in the case of CIT vs. Shahzada Nand & Sons & Ors. (1966) 60 ITR 392 (SC). The relevant extracts from the head note is reproduced hereunder :
"The doctrine, generalia specialibus non derogant, embodies a rule of construction, but it has no universal application. To invoke it, the general and special provisions should occupy the same field.
In a taxing Act one has to look merely at what is clearly stated, and in a case of reasonable doubt the construction must beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the Court as to what is just or expedient. The expressed intention must guide the Court."
61. In the light of the aforesaid principles laid down by the Hon'ble Supreme Court, it would be necessary to first examine the true and correct scope and meaning of the expression "for acquiring" any know-how used in s. 35AB of the Act. The dictionary meaning of the term "acquire" as given in the following Dictionaries is as follows :
The Shorter Oxford Dictionary :
Acquire - 1. To gain, or get as one's own.
2. To receive, to come into possession of."
62. The Black' Law Dictionary :
"Acquire" :- To gain by any means, usually by one's own exertions, to get as one's own, to obtain by search, endeavour, investment, practice or purchase; receive or gain in whatever manner, come to have. In law of Contracts and of descants, to become owner of property, to make property one's. To gain ownership of .....
63. The aforesaid dictionary meanings indicate that the term "acquire" in relation to contractual rights means the asset as owner thereof, to get as one's own or to gain ownership over the thing acquired in terms of the relevant contract.
64. It may also be pertinent to reproduce hereunder the comments given by the learned author Shri Kanga and Palkhivala in their book "The Law and Practice of Income Tax", 8th Edn., Vol. 1 at p. 573 :
"Section 35AB. Expenditure on know-how - This section allows deduction, spread over six years, of a lump sum consideration paid for acquiring know-how for the purposes of business. The section, which is an enabling section and not a disabling one, should be confined to that consideration which would otherwise be disallowable as being on capital account. A payment for acquiring know-how or the use of know-how which is on revenue account is allowable under s. 37, and does not attract the application of this section at all."
65. Let us also examine the object and intention with which the provisions of s. 35AB were introduced. The extracts from the Budget Speech of Hon'ble Finance Minister for 1985-86 as published in (1986) 152 ITR 76, 80 (St) is reproduced hereunder :
"With a view to provide further encouragement of indigenous scientific research, I propose to provide that lump-sum consideration received by scientists for the know-how developed by them would be spread over a period of three years and charged to tax accordingly. I also propose to provide that industry may write off the lump sum consideration paid for acquiring know-how in six annual instalments."
66. The memorandum explaining the said provisions introduced in Finance Bill, 1985 as published in (1985) 152 ITR 155 (St) shows that s. 35AB was inserted for providing a special incentives, as is evident from the fact that the Memorandum explaining the said provision appears under the following heading : "Provisions for special incentive in certain cases". Refer (1985) 152 ITR 163 (St). The relevant extracts from the said Memorandum explaining the purpose of introducing s. 35AB, as given in para 44 appearing at (1985) 152 ITR 166 (St) is also reproduced hereunder :
"44. Deduction in respect of expenditure on know-how. - It is proposed to insert a new s. 35AB in the IT Act to provide that any lump sum consideration paid by a taxpayer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it equally over six years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the know-how is developed in a laboratory, university or institution referred to in sub-s. (2B) of s. 32A, the consideration shall be spread equally over three years."
67. It is clear from the speech of the mover of the Bill, the Memorandum explaining the provisions of the relevant Finance Bill and from the facts discussed above that the provisions of s. 35B were introduced to provide further incentive in respect of allowability of payments made for the acquisition of technical know-how regardless of the fact that capital expenditure incurred on acquiring technical know-how were earlier not allowable under s. 37(1). The intention of inserting of s. 35AB was certainly not to deny the benefit of deduction of entire amount of revenue expenditure incurred on technical know-how, which was already allowable under s. 37 of the Act.
68. It may also be relevant here to refer to the decisions of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 (SC) which explains the principles relating to interpretation of a provision in a taxing statute granting incentives for promoting, growth and development of industrial undertakings. The relevant extracts from the head-note of the said judgment is reproduced hereunder :
"Sec. 15C of the Indian IT Act, 1922, read as a whole, is a provision directed towards encouraging industrialisation by permitting an assessee setting up a new industrial undertaking to claim relief from tax to the extent of tax on six per cent, of the capital employed every year. But the legislature took care to restrict such benefit only to those undertakings which were new in form and substance, by providing that the undertaking should not be "formed" in any manner provided in cl. (i) of s. 15C(2). By that clause, the legislature intended to control any attempt or effort to abuse the benefit intended for new undertakings by changing of label. The intention was not to deny the benefit to genuine new industrial undertakings but to control the mischief which might have otherwise taken place. Adopting a literal construction would result in defeating the very purpose of s. 15C. Therefore, it becomes necessary to resort to a construction which is reasonable and purposive to make the provisions meaningful.
A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it."
69. In view of the aforesaid facts, discussions and judgments, we are inclined to agree with the view taken by the Calcutta Bench of the Tribunal in case of Wellman Incandescent India Ltd. (supra) in which it was held that the assessee's right to have deduction in respect of payments made for obtaining the use of the technical know-how allowable as revenue expenditure under s. 37 remains unaffected by new s. 35AB introduced with effect from asst. yr. 1986-87. Sec. 35AB is an enabling section and not a disabling or prohibitive one and, therefore, it should be held to be applicable to that consideration paid for acquiring technical know-how which would otherwise be disallowable as being on capital account.
70. Even assuming that s. 35AB covers within its ambit the lump sum consideration paid for acquiring technical know-how on capital account that is acquiring the same as owner thereof as well as acquiring the know-how simply for user thereof for purposes of assessee's business, the allowability of expenditure of revenue nature incurred for acquiring technical know-how for use in business under s. 37(1) will not be adversely affected. Both the provisions, namely, s. 35AB and s. 37(1) are enabling provisions. These two sections are not mutually exclusive, as is evident from the fact that no non obstante clause excluding the applicability of s. 37(1) has been provided in s. 35AB of the Act. The assessee will be entitled to claim deduction under any one of these two provisions, whichever is beneficial to him. Such a view is fortified by the judgment of Hon'ble Supreme Court in case of CIT vs. Indian Engg. & Commercial Corpn. (P) Ltd. (1993) 201 ITR 723 (SC) and CIT vs. Continental Construction Ltd. (1996) 230 ITR 485 (SC). It was held in the aforesaid decision that in the case of Directors who are also employees, both the provisions of s. 40(c) and 40A(5) will be attracted and higher of the two ceilings has to be applied. It may be useful to reproduce the relevant extracts from the head-note of the judgment in the case of Continental Construction Ltd. (supra) :
"Originally, s. 40(c) contained sub-cl. (iii) dealing with expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee. The expenditure on employees is now removed from s. 40(c) and incorporated in s. 40A(5). The two s. 40(c) and 40A(5) are, however, not mutually exclusive. In s. 40(c), the proviso, for example, refers to a case where the director, (or a person who has a substantial interest in the company or a relative of the director or of such person) is also an employee of the company for any period prescribed in the previous year. In that situation, expenditure of the nature referred to in cls (i), (ii), (iii) and (iv) of the second proviso to cl. (a) of s. 40A(5) shall not be taken into account for the purpose of calculating the ceiling under s. 40(c) of the Act. It has been held that in the case of directors who are also employees, both these sections will be attracted and the higher of the two ceilings has to be applied [CIT vs. Indian Engineering & Commercial Corporation (1993) 201 ITR 723 (SC)]. If for the purpose of ceiling on expenditure, both ss. 40(c) and 40A(5) are to be applied to employee-directors, there is no reason why for the purpose of deciding what is to be excluded from the expenditure subject to such ceiling both the sections cannot be taken into account. Both sections constitute a composite scheme. For determining the ceiling, the higher ceiling has to be taken into account. Similarly, for determining permissible expenditure which is outside the ceiling limits also, both the sections will have to be applied."
71. In view of the aforesaid facts and discussions, we are of the considered opinion that the allowability of revenue expenditure incurred for obtaining the use of the technical know-how under s. 37(1) remains unaffected by the new s. 35AB introduced from asst. yr. 1986-87.
72. The next question which then requires our consideration is as to whether the expenditure of Rs. 16,42,205 being the lump sum amount of technical know-how payable by the assessee to the Goodyear Tyre & Rubber Company, USA can be treated as revenue expenditure or not.
73. Mr. Goyal, the learned Senior Departmental Representative had placed heavy reliance on the judgment of Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. (supra) and tried to explain the various clauses of the relevant contract of know-how in the light of principles laid down in the said judgment. The learned counsel has stated that the facts of the said judgment are clearly distinguishable. The submissions of the learned counsel for the assessee indicating the distinguishing features have been briefly stated in para 14.14 on p. 20 of this order.
74. In the case of Jonas Woodhead & Sons (India) Ltd. (supra), the IT Authorities had themselves allowed 75 per cent of the sum paid as royalty to the English company as revenue expenditure and the dispute was confined to disallowance of only 25 per cent of the sum paid to the English company which was held as capital expenditure. In that case, the agreement with the foreign firm provided that the foreign firm will not only provide the necessary technical know-how for starting the new business but had also undertaken to render valuable services in the setting up of the factory itself. In the present case, the assessee has obtained the technical know-how for manufacture of radial tyres, which is one of the improved variety of tyres. The manufacture of radial tyres by a manufacturing company which was already engaged in manufacturing of OTR tyres, etc. cannot be treated as setting up of a new business of manufacturing of an entirely new item but the radial tyre was simply an improved variety of tyre, which did not require any new plant and machinery but only needed a change in the chemical composition. The know-how obtained for manufacture of radial tyres was thus meant for improvisation of the existing products. It should be treated as a product of the same line of the existing business carried on by the assessee.
75. The Tribunal in the assessee's own case for asst. yr. 1984-85 had considered the allowability of expenditure of Rs. 55,15,730 being the amount of consideration paid to Goodyear Tyre & Rubber Co. for providing technical know-how, designs and drawings, etc. for manufacture of extra large OTR tyres. The Tribunal after considering the two judgments of the Hon'ble Supreme Court in the case of Scientific Engg. House (P) Ltd. (supra) and Jonas Woodhead & Sons (India) Ltd. (supra) relied upon by the Departmental Representative, came to the conclusion that inclusion of the range of extra large OTR tyres constitute the profit making apparatus of the assessee-company, expenditure was laid out as part of the process of profit earning. It was an outlay of business in order to carry it on and to earn profit. It facilitated the trading operations. It reflected its impact on the profitability of the business. The expenditure in question was held to be allowable as a revenue expenditure. The learned Senior Departmental Representative submitted that the facts of the agreement relating to asst. yr. 1984-85 are different and distinguishable as by the agreement, a technology package comprising of various things were agreed to be provided. The various clauses of the agreement relating to the asst. yr. 1984-85, the gist of which has been given in para 2.2 of the said order of the Tribunal for asst. yr. 1984-85 clearly shows that the technology package comprised of providing designs and drawings, technical data, chemistry on the compounding for the manufacture of the extra large OTR tyres, data on quality control and test programmes, testing facilities at Goodyear, promotion of export of extra large OTR tyres, etc. It was an agreement mainly for providing the required technical know-how, designs, drawings and other know-how and information relating to manufacture of extra large OTR tyres. That agreement did not have any significant difference with the present agreement under consideration executed for obtaining technical know-how for use in the manufacture of radial tyres. The Tribunal while deciding such an issue in favour of the assessee in asst. yr. 1984-85, had mainly relied upon the decisions of the Hon'ble Supreme Court in the case of CIT vs. CIBA of India Ltd. (supra) and Alembic Chemical Works Ltd. vs. CIT (supra). The facts and the ratio of these two judgments have elaborately been discussed in paras 2.7 and 2.8 of the order passed by the Tribunal in asst. yr. 1984-85. The Tribunal has also discussed the facts of the two above referred judgments in the case of Scientific Engg. House (P) Ltd. vs. CIT (supra) and Jonas Woodhead & Sons (India) Ltd. vs. CIT (supra) in para 2.9 and para 2.10 of the said order. The facts relating to the year under consideration are almost similar except that from asst. yr. 1986-87, the provisions of s. 35AB were also inserted in the IT Act. The impact of s. 35AB has already been considered and we have arrived at the conclusion that s. 35AB, which is an enabling provision and which does not exclude applicability of s. 37(1), will not in any manner adversely affect the allowability of revenue expenditure incurred for obtaining technical know-how for use in assessee's business.
76. It may also be relevant here to mention that the activity of manufacture of radial tyres did not require any separate or additional plant and machinery. It only needed a different chemical composition. Such activity was a part of the same business, as there was a common fund, common management, common plant & machinery for manufacture of the improved quality of tyres, namely, radial tyres.
77. The learned Departmental Representative had laid considerable emphasis to certain clauses of the technical know-how agreement relating to the year under consideration such as the absence of any clause relating to return of the designs, drawings and other documents of technical know-how after termination of the contract, etc. to show that such clauses indicate that the assessee had acquired some sort of title of rights of ownership over the technical know-how.
78. It may be relevant here to refer to the judgment of Hon'ble Bombay High Court in the case of Kirloskar Pneumatic Co. Ltd. vs. CIT (supra) in which it was observed that it is not possible to scan a contract in bits and pieces to determine its true nature. The agreement should be considered wholly rather than to put too much emphasis on the various clauses in isolation. The Hon'ble Delhi High Court in the case of Triveni Engg. Works Ltd. (supra) held that despite the use of the words "agreed to sell outright" to the assessee, what the assessee got in substance was a limited right of user for the maximum period of 10 years. In that case, the manufacturing data, drawings, documents, etc. became "the absolute property" of the assessee but the copyrights remained with the foreign company, namely, M/s. Brotherhood & Brokers, U.K. and the assessee had a limited licence to use the same for the purposes of agreement. The agreement prevented the assessee from disclosing or assigning the data etc. to anyone without the written consent of the brotherhoods. It was also held that the fact that payment for such know-how was by way of lump sum and it was for a new business was not of much relevance. There was no absolute parting of the secret process and technical knowledge by the foreign collaborators to the assessee. It was held that no such assets or enduring advantage had been acquired by the assessee. The expenditure was for the use of technical know-how and, therefore, the amount was allowed as revenue expenditure.
79. The Hon'ble High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT (supra) has held as under :
"Held (i) that the payment of Rs. 2,39,084 under Art. VI(a) was in the nature of revenue expenditure. The whole object of agreement was only to obtain the benefit of technical assistance for running the business, a restricted licence for the limited use of the patent rights of Westinghouse and the use was restricted to the assessee alone and for the duration of the agreement of such technical information as may be supplied by Estinghouse. In the light of these features of the agreement it could be appropriately said that Estinghouse did not part with technical knowledge absolutely in favour of the assessee and that Westinghouse had not "sold" their secret processes to the assessee. The period of the agreement was not of a much significance. If the nature of the agreement itself was such that it could not be said that the assessee had absolutely acquired any knowledge or asset, it was difficult to see how even a payment made by way of lump sum to obtain the agreement or to persuade Westinghouse to enter into the agreement could itself have a different character. Further, since the payments were made to have access to the knowledge and information that was necessary to carry on and run the business from day to day, it was not of much significance whether the agreement was entered into at the time of the commencement of a business or in the course of a business which was already being carried on.
If the collaboration agreement results in the absolute transfer of technical knowledge to the assessee, the assessee could be said to have acquired an asset or enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payments cannot be elevated to the status of payments of a capital nature."
80. The Hon'ble Calcutta High Court in the case of Avery India Ltd. (supra) has held as under :
"It is by now well-settled that there is no capital element in the payment for acquiring technical collaboration from foreign manufacturers. Such collaborations are entered into merely for the purpose of running the factory as a more technically viable, efficient and profitable unit to yield larger profit. The mere fact that the foreign collaborators have agreed to give exclusive rights to the assessee to manufacture under their trademark does not make any difference. The assessee's right to make use of the technical know-how and the knowledge even after the period of the agreement is of no consequence."
81. The Hon'ble Bombay High Court in the case of Bajaj Tempo Ltd. vs. CIT (supra) considered the various judgments of the Hon'ble Supreme Court including the judgment of the Hon'ble Supreme Court in Scientific Engg. House (P) Ltd. (supra). After considering the various judgments, the Hon'ble Bombay High Court gave the following findings at pp. 1028 to 1029 :
"We are unable to accept that this proposition applies the assessee's case. This is so, because we are unable to read the assessee's agreement with the German company as an agreement the predominant purpose of which was to render mere documentation service. As pointed in Kirloskar Pneumatic Co. Ltd. vs. CIT (1982) 136 ITR 746 (Bom) it is not possible to scan a contract in bits and pieces to determine its nature, nor by referring to a particular clause. As we read the agreement of the assessee with he German company, the predominant object of the agreement was to render technical know-how to the assessee. In relation to the main purpose, one of the incidental object was to transfer the designs data sheets and such other technical documents. We are unable to accept the agreement of Mr. Jetley that the agreement in question, when read in its entirety, should be held to be an agreement mainly for the purpose of supply of documents. When the true purpose of agreement is discovered there is no difficulty in applying the ratio of the judgments of this Court in Telco's case (1980) 123 ITR 538 (Bom) and Kirloskar Pneumatic's case (supra) to the assessee's case. We are of the view that the agreement was predominantly an agreement for purchase of technical knowledge or information. By expending money thereon, the assessee can neither be said to have brought into existence any asset, or at any rate an asset of an enduring nature. We cannot lose sight of the observations of the Supreme Court made in CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC) and Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC) that in these days of fast changing world of technology, the frontiers of scientific and technical knowledge shift rapidly, and what is current today may become obsolete in no time. The thread of reasoning which runs from Ciba's case (supra) to Alembic's case (supra) and through the several judgments of our High Court noticed by us, supports the view that the state-of-the-art technology of modern times can neither be deemed to be permanent, nor of an enduring nature, so as to satisfy the 'enduring asset' test."
82. The Hon'ble Supreme Court in the case of Alembic Chemicals Works Co. Ltd. (supra) inter alia, held as under. The relevant extracts from the head-note are reproduced hereunder :
"(ii) That there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations, for the commercial production of penicillin in the appellant's existing plant had become obsolete or inappropriate in relation to the explanation of the new sub-cultures of the high yielding strains supplied by meiji. The mere improvement in or updating of the fermentation-process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the appellant.
(iii) That the limitations placed in the agreement on the right of the appellant in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how pertained more to the use of the know-how than to its exclusive acquisition.
(iv) That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business venture. The further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant.
By the Court : (i) "It would be unrealistic to ignore the repaid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.
(ii) The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context."
83. In the present case, the assessee obtained right to use the technical know-how for manufacturing of radial tyres, which was meant for improvisation in the process and technology for manufacture of tyres. It was a part of the existing line of business. The agreement provided the conditions as to non-transferability to others without the permission of the foreign company, it also contained clauses relating to confidentiality and secrecy of the know-how, it contained prohibition for user of the know-how upon termination of the agreement. It only provided a licence to the assessee to use such technical know-how for a limited period as provided in the agreement. The reading of the agreement as a whole in the light of the aforesaid judgments of the Hon'ble apex Court, Hon'ble Jurisdictional High Court and other judgments referred above, would make it crystal clear that the expenditure incurred by the assessee by way of lump sum consideration payable for obtaining technical know-how, etc. for manufacture of radial tyres is clearly allowable as revenue expenditure.
84. On a careful consideration of the entire relevant facts, material and decisions, we are of the considered opinion that the assessee is clearly entitled to deduction of Rs. 16,42,205 as revenue expenditure under s. 37(1) of the Act. The AO is, therefore, directed to allow the same. Accordingly Ground No. 1(a) is allowed.
85. Ground No. 1(b), containing the alternative prayer is rejected in view of submissions made by the learned counsel for the assessee, which have been briefly stated in para 14.9 of this order. Even on merits, Ground No. 1(b) will not survive in view of our findings given in relation to Ground No. 1(a). Apart from that, if the amount of lump sum consideration paid for acquiring technical know-how is ultimately held to be of capital nature, then its allowability will be governed by s. 35AB. Hence, ground No. 1(b) is rejected.
86. Before parting, we would like to express our feelings of appreciation and admiration for a very able representation made by Shri D. D. Goyal, the learned Senior Departmental Representative, Mr. Goyal had gone through all the judgments relied upon by the learned counsel for the assessee and was able to briefly state the facts and ratio of all those decisions with perfect clarity, brevity without missing the essence thereof.
87. In the result, the assessee's appeal is partly allowed and Revenue's appeal is dismissed.
PHOOL SINGH, J.M. : 25th February, 1999
88. I have the occasion to go through the order prepared by my esteemed brother Shri B. M. Kothari, Accountant Member, but, I am not able to persuade myself to agree with the findings recorded by him on the main ground Nos. 1(a) and (b) of the appeal of assessee in spite of the discussion with him and I proceed to record my order as under :
89. So far as the facts involved in the ground of the assessee are concerned, my esteemed brother had given out the facts in a very apt manner and in detail and also gave out the submissions of the learned counsel for the assessee as well as of learned Departmental Representative and it will be mere repetition to give out those facts as well as respective submissions of learned representatives of parties. It will be in the fitness of things, if I start with recording my findings of issue involved as that will be saving the time as well as the space.
90. After going through the case law, referred to and relied upon by the learned representative of the parties, it will be noteworthy to observe that the issue regarding allowability of amount paid by assessee for acquiring the technical know-how from foreign countries and from other concerns possessing the same for the use of the business of the assessee in relation to manufacturing activities or developments of the existing business had been subject-matter before different High Courts and even before Hon'ble Supreme Court. The controversy involved was whether such expenses were of capital expenditure or revenue expenditure and different decisions on that point had come before us. At the very beginning, we may refer the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC) in which the question for consideration before the apex Court was whether the payment made by the assessee for purchase of "loom hours" was in the nature of capital expenditure or revenue expenditure. In the said case, the assessee-company was carrying on the business of manufacture of jute being member of Indian Jute Mills Association. The assessee-company purchased "loom hours" from four other mills for a sum of Rs. 2,03,255 and claimed deduction treating the same as revenue expenditure. In Tribunal assessee succeeded, but Hon'ble High Court concluded that purchase of "loom hours" was in the nature of capital expenditure and as such no deduction could be claimed. But the Hon'ble apex Court reversing the decision of High Court observed that acquisition of additional "loom hours" did not add to the fixed capital of the assessee as permanent structure from which the income was obtained, remained the same and that acquisition of looms which constituted the profit-making apparatus of the appellant and expenditure laid out as a part of the process profit earning was to be treated as the revenue expenditure. Their Lordship further laid down that there may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on a revenue account and a test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee, that brings the case within the principle laid down in this test. What is material is to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
91. After this, we have two cases of Jurisdictional High Court in case of Triveni Engg. Works Ltd. vs. CIT (1982) 136 ITR 340 (Del) and in case of Addl. CIT vs. Shama Engine Valves Ltd. (1982) 138 ITR 216 (Del) in which the same controversy was there and expenses borne by the assessee in getting technical know-how and services was held to be revenue expenditure.
92. Later on, we may refer the decision of Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. vs. CIT (1989) 177 ITR 377 (SC) (supra) and their Lordship's observations in the case are very material to be noted which are as under :
"(i) It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a title slow and circumspect in too readily pigeon holing an outlay, such as this, as capital.
(ii) In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be overexacting.
(iii) The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it.
The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context."
93. Their Lordship have discussed all the case laws on the point from different High Courts and on the basis of facts available on record concluded that the amount paid by the assessee for obtaining the know-how to produce higher yield sub-cultures of high yielding strains of penicillin will be revenue expenditure and not capital in nature.
94. After that we are having the case of Calcutta High Court in the case of CIT vs. Avery India Ltd. (1994) 207 ITR 813 (Cal) in which amount paid for technical know-how and for having exclusive right to use trade mark & patent of foreign concern was treated as revenue expenditure. Again in the case of Madras Rubber Factory Ltd. (1995) 212 ITR 443 (Mad) technical fees paid to foreign company for collaboration was held to be revenue expenditure after following the earlier decision noted at CIT vs. Madras Rubber Factory Ltd. (1984) 149 ITR 411 (Mad). Then we are having the case of Tribunal Special Bench decision in the case of IAC vs. Bajaj Tempo Ltd. (1996) 55 TTJ (Pune)(SB) 43 : (1996) 218 ITR (AT) 147 (Pune)(SB) in which the amount paid for technical know-how for updating technology and running existing business more efficiently was treated as revenue expenditure after following the ratio of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) the ratio of the case of Alembic Chemical Works Co. Ltd. (supra) and after discussing other decisions of different High Courts.
95. After that we are having the decision of Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 224 ITR 342 (SC) and their Lordships have again discussed all the case law available on the point to conclude as to whether the expenses paid by the assessee as royalty to foreign company for supply of technical know-how and services for setting up plant and manufacture of products without any embargo on manufacture even after expiry of agreement will be capital or revenue in nature. Their Lordships laid down the several factors on which the above question can be replied and the guidelines are as under :
"(i) Whether the assessee obtained completely new plan with a complete new process and completely new technology for manufacture of the product;
(ii) Whether the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced;
(iii) Whether the improvisation made is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made;
(iv) Whether the expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the fact that has been set up with the collaboration of foreign firm;
(v) Whether the assessee derived benefits coming to capital for which the payment was made."
96. Their Lordships affirmed the view of AO that 25 per cent of the whole of the amount was rightly treated as capital expenditure. Lastly, the Bombay High Court after discussing the decision of Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) (supra) concluded in the case of CIT vs. Kirloskar Tractors Ltd. (1998) 98 Taxman 112 (Bom) that expenses borne by assessee to obtain know-how for manufacturing tractors and engines as per the terms and conditions of the agreement in which assessee had right only to use know-how but could not assign, incumber, let or sub-lease the right and to maintain secrecy was held to be revenue expenditure.
97. From the above, it transpires that the issue as to whether any amount will be treated as capital in nature or revenue shall be depending on different factors and particularly on the true appreciation of the different terms and conditions in view of the guidelines laid down by Hon'ble Supreme Court from time to time and then to conclude as to whether amount was to be treated as revenue expenditure or capital expenditure. The other vital point to be observed is that all these cases relate to assessment of different assessees prior to asst. yr. 1986-87 when the allowability or otherwise of such expenses were being examined by apex Court and different High Courts under s. 37(1) of the Act which is residuary section providing a general expenses allowable for determining the gain and profits of the business. It is also to be noted that provisions of s. 35AB of the Act were not on a statute by that time. As legal position was in fluid and assessee while claiming the expenses in obtaining technical know-how from foreign country and from others had been facing hardships to travel upto High Courts as well as in some cases upto Hon'ble Supreme Court, it appears to be the reason that legislature thought it fit to provide some easy process for allowability of the amount so paid by assessee in acquiring technical know-how and provisions of s. 35AB were brought on a statute by Finance Act, 1985 w.e.f. 1st April, 1986 i.e. asst. yr. 1986-87 onwards.
98. The first question arises as to what was the necessity to bring the provisions of s. 35AB under s. 35 of the Act and for that we may point out that s. 35 comes under the heading of "expenditure on scientific research". If we go further, then it may be seen that initially it was s. 10(2)(xii) of IT Act, 1922 which provides allowability of any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. Against it, the legislature brought s. 35 providing deduction in respect of expenditure on scientific research under s. 35 of the Act. As this expenditure for acquiring know-how for the use of the business is related to specific technology and information being developed by any concern, legislature brought it under different provisions of s. 35 which was subsequently added. First of all, s. 35A was added to s. 35 providing the mode for allowing expenditure on acquisition of patent rights or copy rights by inserting that section under Finance Act, 1966, w.e.f. 1st April, 1966. The legislature had been wise enough in using the words as under :
"35A. Expenditure on acquisition of patent rights or copy rights - (1) In respect of any expenditure of capital nature incurred after 28th February, 1966 on the acquisition of patent rights or copy rights ....."
99. Legislature again added s. 35AB by Finance Act, 1985 w.e.f. 1st April, 1986 providing mode of allowability of expenditure for acquiring any know-how for use of the purpose of his business.
100. Afterwards the legislature allowed allowability of expenditure for obtaining licence to operate telecommunication services by adding s. 35ABB by Finance Act, 1977 w.e.f. 1st April, 1996 and while doing so, the legislature in its wisdom has provided as under :
"35AB - (1) In respect of any expenditure being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services and for which payment has actually been made to obtain a licence ... be allowed for each of the relevant previous year, deduction equal to appropriate fraction of the amount of such expenditure".
101. From the perusal of the above, it shall reveal important feature of the legislature that while adding s. 35A of s. 35ABB the legislature had used the word "capital expenditure" meaning thereby that legislature was providing a deduction to assessee in respect of capital nature so incurred for acquisition of patent rights or copy rights or for obtaining licence to operate tele-communication services but legislature had purposely not used the word "capital expenditure" while providing a mode of availability of expenditure on acquiring any know-how vide under s. 35AB. From the words used by the legislature the intention thereof can easily be inferred that legislature was going to abolish the distinction between the revenue and capital expenditure incurred by assessee on acquiring of technical know-how that is why the word "capital expenditure" was not used in section 35AB and further word "any" was used before words "lump sum consideration" in that section and for that we have to go through the actual words used in that section but fact remained that the very purpose was to bring such expenses under this Head s. 35AB.
102. Before we examine the case of the assessee, it will be in the fitness of things to reproduce the actual words used by the legislature and s. 35AB reads as under :
"35AB. (1) Subject to the provisions of sub-s. (2), where the assessee has paid in any previous year (relevant to the assessment year commencing on or before the 1st April, 1998) any lump sum consideration for acquiring any know-how for the use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amounts shall be deducted in equal instalments for each of the five immediately succeeding previous years.
(2) Where the know-how referred to in sub-s. (1) is developed in a laboratory, university or institution referred to in sub-s. (2B) of s. 32A, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years.
Explanation :- For the purposes of this section, "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto."
103. A perusal of the above shall show that three conditions have been laid down for allowing the claim of the assessee -
(i) assessee should pay any lump sum consideration;
(ii) for acquiring any know-how;
(iii) such know-how should be for use for the purpose of a business.
104. Let us examine the case as to whether the present case of the assessee is fulfilling the above conditions or not.
105. A perusal of copy of agreement dated 1st December, 1984 entered in between the assessee and M/s Goodyear Tyre & Rubber Co., Akron, Ohio (U.S.A.) [hereinafter referred to as Goodyear (U.S.A.)] the copy of which is appearing at pp. 1 to 12 of the paper book shall reveal that assessee had agreed to pay US $96,000 (equivalent to Rs. 16,42,205) for acquiring technical know-how for manufacturing of radial passenger tyres and has paid Rs. 3,19,768 during the year under consideration as part payment.
106. The other condition requires that assessee should acquire any know-how. For true interpretation, we have to examine the meaning of the word "for acquiring" any know-how. The dictionary meaning of the term of "acquire" had been given in the following dictionaries as under :
107. The Shorter Oxford Dictionary "Acquire" - "1. To gain, or get as one's own;
2. To receive, to come into possession of."
The Black's Law Dictionary :
"Acquire" - "To gain by any means, usually by one's own exertions, to get as one's own, to obtain by search, endeavour, investment, practice or purchase; receive or gain in whatever manner, come to have. In law of contracts and of descants, to become owner of property, to make property one's own. To gain ownership of ......"
108. In common use, the word "acquire" as referred to above means "to gain", or "to get as one's own", "to receive", "to come into possession of". In law of Contracts, the word "acquire" indicate that one becomes the owner of the property or to make the property one's own.
109. Now, we have to find out at as to how the word "for acquiring any know-how" had been used by the legislature. Needless to point out that when words used by the legislature in any enactment then literal explanation thereof is to be assigned to those words as laid down by the Hon'ble Supreme Court in the case of CIT vs. Shahzada Nand & Sons (1966) 60 ITR 392 (SC) wherein it was laid down that the underlined principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notion which may be entertained by the Court as to what is just or expedient. As noted by us, there had been divergent views of different High Courts and apex Court on the issue of allowability or otherwise of a claim of any assessee in respect of amount incurred for acquiring any know-how from foreign country or other concern, legislature thought it fit to use the word "for acquiring any know-how" in wider sense. The word any has got its significance in providing wider meaning not only to know-how but to the word "acquiring" and in that context we have to see the literal meaning of "acquire" as given above meaning thereby to get" or "to receive" or to "come into possession". The assessee as evident from the copy of agreement, the copy of which is appearing at pp. 1 to 12 of the paper book acquired technical data which shall mean technological developments, plans, specifications, designs, secret manufacturing processes, formulae, bills of material and similar data relating to the development, manufacture, testing, servicing, maintenance and operation as well as improvement of the radial fabric passenger tyres for a payment of US $ 96,000. The other terms and conditions require that assessee-company shall be paying royalty equal to 2 per cent for a period of 5 years, on the amount to be calculated in terms of that agreement. This agreement was for a period of 8 years. The other terms and conditions require that during the currency of the agreement period the assessee-company shall maintain technical datas so provided by Good Year (U.S.A.) in secret and will not be divulged to anyone without written consent of the Goodyear (U.S.A.) The assessee-company was under the obligation not to assign any of the right or interest accrued through this agreement to any third party except with the written consent of the staff. From the above terms and conditions, it is clear that the assessee obtained all the rights in the technical data required for manufacturing of radial fabric passenger tyres from Goodyear (U.S.A.) for permanent use in the future except with the rider that it will not assign any right or title to any third party without consent of the Goodyear (U.S.A.) but the assessee for all the purposes became owner of the technical datas and was not required to return those datas. In the literal meaning of word "acquire" the assessee had fulfilled all the requirements by obtaining or getting into possession of the technical datas from foreign country. Even if the meaning of word "acquire" in context of law of contracts is also applied, assessee became owner of the technology so obtained from Goodyear (U.S.A.) against all the world except with the rider that it will not assign any technical data to any other person except with the written consent of the Goodyear (U.S.A.) It is also to be kept in mind that assessee had been using the technology so obtained for manufacturing of radial passenger tyre even after expiry of agreement period of 8 years and has not returned all the technical datas to Goodyear (U.S.A.) On the basis of above, the requirement word "for acquiring any know-how" is fulfilled so far as the case of the assessee is concerned.
110. Further it is also to be noted that word "know-how" has also been defined by the legislature in the explanation attached with s. 35AB meaning thereby any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits.
111. The word "acquire" is to be read in the context of explanation of the word "know-how" and that suggest that if any assessee is using any industrial information or technique which may assist in the manufacture or processing of goods then he is supposed to have acquired the know-how. In the case in hand, the assessee obtained the specific technical data which had been defined in the agreement entered in between assessee and Goodyear (U.S.A.) for manufacturing of radial passenger tyre and thus assessee shall be treated to have acquired the know-how from Goodyear (U.S.A.) and second requirement of s. 35AB stood confined.
112. It is also the case in between the parties that assessee had paid to part of the consideration for acquiring of know-how in the year under consideration and last requirement of s. 35AB is also fulfilled by the assessee.
113. The result of the above discussion is that the assessee had fulfilled all the requirements of s. 35AB and the transaction in dispute is fully covered by the provisions of s. 35AB as the assessee for a lump sum consideration had acquired industrial information for technique which was going to assist in the manufacturing of radial passenger tyre.
114. It had been the main contention of the learned counsel for the assessee that expenditure in the above referred to two transactions was of revenue nature and allowable under s. 37(1) of the Act and not covered under the provisions of s. 35AB which is meant for allowing capital expenditure. As pointed above, the legislature had purposely missed the word "capital expenditure" in s. 35AB while the same was used in s. 35A which was brought to statute as early as in 1966 and also used that word "capital expenditure" in s. 35ABB brought to statute in 1996, much after the provision of s. 35AB and thus the first plea of the learned counsel for the assessee that provisions of s. 35AB relates to allowability of capital expenditure and not of revenue nature is not well founded.
115. So far as the second plea of allowability of claim of the assessee under s. 37(1) is concerned, we have to look into the provisions of s. 37(1) which reads as under :
"37(1) General expenses-Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'."
116. The words used in the brackets are very significant because provisions of ss. 30 to 36 of the Act have been excluded from this section which is treated as residuary section. There had been controversy as to whether claim of the assessee covered under ss. 30 to 36 if not found admissible in those sections, can be allowed under the provisions of s. 37(1) of the Act or not and what is significant of putting the ss. 30 to 36 under bracket. The decision of Kerala High Court in the case of CIT vs. High Land Produce Co. Ltd. (1976) 102 ITR 803 (Ker) may be looked into in which their Lordships have traced out the very purpose of using these words not being expenditure of the nature described in ss. 30 to 36 in bracket of s. 37(1). Their Lordships have noted as under :
"To understand the scope of ss. 36 and 37, it is necessary to go back to the Indian IT Act, 1922, and find out the origin of the words within the brackets which have been relied on by counsel for the Department. Those words were introduced into the Indian IT Act, 1922, by Act 25 of 1953. The reason for introducing these words have been stated in the note to sub-cl. (a)(iii) of s. 8 of Act 25 of 1953 in these terms :
This is a clarificatory amendment to make it clear that the revenue expenditure admissible under this residuary clause is that which is not specifically covered by the preceding clause. If it is covered by those clauses, it should be admissible only under those clauses, and not under this residuary clause."
117. No doubt, their Lordships have also observed that the object of s. 37(1) of the Act is not to preclude the consideration of the claim which will not fall under ss. 30 to 36 of the Act. In other words, the mere fact with the claim will not fall under any of the ss. 30 to 36 will not automatically make the claim unsustainable under s. 37(1) of the Act as well. Because in that condition the interpretation shall be to detach from the residuary nature of provision of s. 37(1) of the Act. The only inference out of the ratio of their Lordships is that provisions of s. 37(1) are residuary in nature and in case claim of the assessee is covered under ss. 30 to 36 of the Act then the same shall not be entertained in s. 37(1) of the Act as the very words used in s. 37(1) exclude the deductions referred to under ss. 30 to 36. The same was the view in the case of CIT vs. Carborundum Universal Ltd. (1977) 110 ITR 621 (Mad) in which it was laid down that expenditure subsequently covered by ss. 30 to 43A of the Act cannot be deducted under general principles of ss. 37(1) of the Act. The other view on the point is that of Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. vs. CIT (1980) 122 ITR 168 (AP) and that of Hon'ble J&K High Court in the case of Chenab Forest Co. vs. CIT (1974) 96 ITR 568 (J&K). In all these cases the ratio is that once any expenditure is covered under ss. 30 to 36 that shall not be the subject-matter of allowability under s. 37(1). No doubt, if a claim of the assessee is not covered under these provisions, naturally allowability thereof can be examined under residuary provisions of s. 37(1) which is of general nature except to the prohibitions laid down in the said section that expenditure should not be of capital nature, that should not be of personal expenses of the assessee.
118. From the above, the only inference which can legally be drawn is that all the claims for deduction which are specifically covered under the provisions of ss. 30 to 36 will not be subject-matter of allowability or otherwise under s. 37(1) which is of residuary in nature. As we have already concluded that the case of the assessee is fully covered under the provisions of s. 35AB, the assessee's claim is to be disposed of in the manner laid down in the s. 35AB and assessee cannot be allowed to fall back under the provisions of s. 37(1) of the Act. If we allow such proposition to the assessee then it will make the provisions of s. 35AB entirely redundant and will be frustrating the very intention of the legislature and such proposition cannot be allowed to stand.
119. The Tribunal Calcutta Bench in the case of Wellman Incandescent (India) Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal) had an occasion to discuss the provisions of s. 35AB of the Act but fact of that case were quite different to the facts in case. As in that case, the technical know-how obtained by the assessee was for manufacturing a particular item and for a particular period and the Tribunal was swayed by the earlier preposition of law laid down by different High Courts and as well as by Hon'ble Supreme Court that such expenditure is allowable under the s. 37(1) and that Bench had discussed the allowability of the expenditure under s. 37(1) without taking into the consideration that all the deductions mentioned under ss. 30 to 36 of the Act have been excluded from the provisions of s. 37(1) of the Act. Position would have been different if the case of the assessee was not covered under s. 35AB of the Act and then its allowability or otherwise could have been examined under s. 37(1) but as we have concluded that assessee's case is entirely covered under the provisions of s. 35AB, provisions of s. 37(1) cannot be pressed into action. Apart from it, it may also be noted that provisions of s. 35AB are quite simple to be read and there was no necessity for different interpretation as such interpretations are needed when there is any ambiguity in the provisions. If the provisions of any enactment are easily understood by the subjects, Courts are not supposed to enter into the arena of interpretation which may be unnecessary. In the case in hand, even assessee was fully alive to the simplicity of the provisions of s. 35AB and he had raised alternative plea before authorities below that if provisions of s. 35AB are applicable 1/6th of the whole of the amount be allowed in the year under consideration. It shows that assessee was also fully alive that provision of s. 35AB were applicable to the transaction in question and thus we conclude that approach of the AO to apply the provision of s. 35AB to the facts of the case in hand was justified and CIT(A) rightly confirmed the same.
This ground accordingly fails.
120. So far as the other finding recorded by my learned brother is concerned, I do agree and adopt those findings as my own.
REFERENCE UNDER S. 255(4) OF IT ACT, 1961 PHOOL SINGH, J.M. : 25th February, 1999
121. As we have difference of opinion of ground Nos. 1(a) & (b) of assessee's appeal in ITA No. 1726/Del/1991, we refer the following question to the Hon'ble President of Tribunal, Mumbai, for necessary action.
"Whether, on the facts and circumstances of the case, the amount of Rs. 16,42,205 incurred by the assessee on acquiring of technical know-how, drawings and designs for manufacturing of radial passenger tyres was allowable as per provisions of s. 35AB of IT Act, 1961 or under s. 37(1) of the Act ?"
Sikander Khan, A.M. (As Third Member)
1. This appeal was heard by the Division Bench of the Tribunal. The order was proposed in appeal by the learned Accountant Member. The learned Judicial Member did not agree to the proposed order. In view of the difference between the learned Accountant Member and the learned Judicial Member, the following question was referred together by the learned Judicial Member and the learned Accountant Member to the Hon'ble President of the Tribunal :
"Whether, on the facts and circumstances of the case, the amount of Rs. 16,42,205 incurred by the assessee on acquiring of technical know-how, drawings and designs for manufacturing of radial passenger tyres was allowable as per provisions of s. 35AB of IT Act, 1961 or under s. 37(1) of the Act ?"
2. The Hon'ble President of the Tribunal appointed me as a Third Member under s. 255(4) of the IT Act.
3. The assessee claimed deduction of Rs. 16,42,205 being the equivalent of US $ 96,000 which the assessee had agreed to pay to M/s Goodyear Tyre & Rubber Co., Akron, Ohio under agreement dated 1st December, 1984 for technical know-how fees for manufacturing of radial passenger tyres. Necessary approval from the Ministry of Industries, Department of Industrial Development, Government of India and Reserve Bank of India had been obtained for the said agreement. Besides the aforesaid lump sum amount the assessee was also required under the agreement to pay royalty at the rate of 2 per cent or net ex-factory sales price of the product for a period of 5 years beginning with the commencement of commercial production of the commercial products.
4. The AO was of the view that the assessee had acquired benefit of enduring nature in terms of the said agreement of manufacturing of radial tyres. He, therefore, rejected the assessee's claim for deduction of the amount of Rs. 16,42,205 as revenue expenditure. He treated the same as capital expenditure.
5. Alternative plea was also made before the AO that in case is was not treated as revenue expenditure, 1/6th of the said amount should be allowed as deduction under s. 35AB of the Act. In this regard the AO observed that the assessee had paid only Rs. 3,19,768 being the first instalment in the year 1985. He accordingly allowed deduction of 1/6th of the said amount, i.e., Rs. 64,961.
6. Aggrieved, the assessee preferred first appeal before the learned CIT(A), who concurred with the AO in the view that the assessee had derived benefit of enduring nature and, therefore, the aforesaid lump sum amount of Rs. 16,42,205 was capital expenditure. He added that the assessee under the agreement had obtained assets in the shape of technical know-how information, drawings, designs, formulae in consideration of the aforesaid amount of expenditure. He relied on the Supreme Court's decision in Scientific Engg. House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC). The learned CIT(A) further observed that the technical know-how obtained under the agreement was for manufacture of radial tyres which was additional product of the manufacturing unit, on which ground also the aforesaid amount had to be treated as capital expenditure.
7. Aggrieved further the assessee preferred second appeal before this Tribunal.
8. After hearing the learned authorised representatives of both the parties in dispute, the learned Accountant Member in his proposed order analysed the facts of the case, rival submissions and various reported judgments vide paras. 15 and 16, pp. 22 to 40 of the Tribunal order. After analysing under s. 35AB in the light of the observations of ss. 35A, 35ABB, 37(2B), 37(3A), 37(3B), 40, 40A and 43B, he observed that it was clear from these observations that wherever legislature wanted to restrict the allowability of expenditure, which was otherwise allowable under s. 37(1) non obstante clauses such as "notwithstanding anything contrary contained in any other provisions of this Act" or "notwithstanding anything contained in sub-s. (1) of s. 37" have been added in such restrictive and prohibitive sections. No such obstante clause had been used in s. 35AB. Therefore, the absence of these words "expenditure of a capital nature" in s. 35AB as had been used in ss. 35A, 35ABB, would not mean that expenditure incurred for acquiring any know-how for the purposes of business which was allowable as revenue expenditure under s. 37(1) would fall under s. 35AB. There was no such express intention of the legislature. He relied on CIT vs. Shahzada Nand & Sons (1966) 60 ITR 392 (SC). The learned Accountant Member also discussed the meaning of the word "acquiring" used in s. 35AB and observed that the term "acquire" would mean to acquire the assets as owner thereof. He then referred to the budget speech of Finance Minister for 1985-86 with regard to the introduction of s. 35AB and to the Memorandum explaining the said provisions and then observed that it was evident from all this that s. 35AB was inserted for providing the special incentive in respect of allowability of lump sum payment made for acquisition of the technical know-how regardless of the fact that capital expenditure incurred on acquiring technical know-how was earlier not allowable under s. 37(1). He added that the intention of inserting s. 35AB was certainly not to deny the benefit of deduction of entire amount of revenue expenditure incurred on technical know-how which was already allowable under s. 37(1). In this connection, the learned Accountant Member referred to the decisions on interpretation of taxing statute in the case of Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 (SC). He, therefore, agreed with the view taken by the Calcutta Bench of Tribunal in Wellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal) in which it was held that the assessee's right to have deduction in respect of the payments made for obtaining the use of the technical know-how allowable as revenue expenditure under s. 37 remained unaffected by the s. 35AB introduced with effect from asst. yr. 1986-87. Sec. 35AB is enabling section and not disabling or prohibiting one and, therefore, it should be held to be applicable to that consideration made for acquiring technical know-how, which would otherwise be disallowable as being on capital account.
9. The learned Accountant Member then observed that even it if was assumed that s. 35AB covered within its ambit the lump sum consideration of Rs. 16,42,205 claimed for acquiring technical know-how on capital account, i.e., acquiring the same as owner thereof as well as acquiring the know-how simply for user thereof for the purposes of assessee's business, the allowability of expenditure of revenue nature incurred for acquiring technical know-how for use in business under s. 37(1) would not be adversely affected. Sec. 35AB and 37(1) both are enabling sections. They are not mutually exclusive, as is evident from the fact that no non obstante clause excluding the applicability of s. 37(1) had been provided in s. 35AB. Thus under the above assumption the assessee would be entitled to deduction under any of these two sections, whichever is beneficial to the assessee. In this connection, he relied on the Supreme Court decision in CIT vs. Indian Engg. & Commercial Corpn. Ltd. (1993) 201 ITR 723 (SC) and CIT vs. Continental Construction Ltd. (1998) 230 ITR 485 (SC). Then he held that the allowability of revenue expenditure incurred for obtaining the use of the technical know-how under s. 37(1) remained unaffected by the new s. 35AB introduced from 1986-87.
10. Then the learned Accountant Member considered the question whether the expenditure of Rs. 16,42,205 being the lump sum amount for technical know-how payable to the Goodyear Tyre & Rubber Co., U.S.A. by the assessee could be treated as revenue expenditure or not. He observed that since the assessee was already engaged in manufacturing tyres, the obtaining of technical know-how for manufacturing of improved variety of tyre i.e., radial tyre could not be treated as setting up of new business which did not require any new plant and machinery but only needed a change in the technical composition. The know-how obtained for manufacture of radial tyres was thus meant for improvisation of the existing products. In this connection, he referred to the Tribunal order in assessee' own case in asst. yr. 1984-85, wherein expenditure of Rs. 55,15,730 being the amount of consideration paid to Goodyear Tyre & Rubber Co. for providing technical know-how of manufacture of extra large OTR tyres, was treated as revenue expenditure, after the consideration of Supreme Court's decisions in CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC), Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC), Scientific Engg. House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC) and Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 224 ITR 342 (SC). That agreement did not have any significant difference with the present agreement. The only new common thing in asst. yr. 1986-87 which was not present in asst. yr. 1984-85 is s. 35AB, which was inserted with effect from asst. yr. 1986-87. However, since it had already been held by the learned Accountant is above, that s. 35AB did not adversely effect that allowability of revenue expenditure on technical know-how under s. 37(1), even the presence of s. 35AB in asst. yr. 1984-85 would have made no difference.
11. The learned Accountant Member also duly examined the various clauses of the agreement between the assessee and Goodyear Tyre & Rubber Co., USA and then held that the assessee did not acquire ownership right but it only obtained right to use the technical know-how for manufacturing radial tyres, which was meant for improvisation of existing product of tyre manufactured by the Goodyear. The agreement only provided a licence to the assessee to use the technical know-how for a limited purpose as mentioned in the agreement. The agreement provided the conditions as to non-transferability to others without the permission of the Goodyear Tyre & Rubber Co., USA. It also contained clauses relating to confidentiality and secrecy of the know-how. It contained prohibition for user of the know-how upon termination of the agreement. The learned Accountant Member, therefore, held that the absence of any clause relating to return of the designs, drawings and other documents of technical know-how after termination of agreement would not make it a case of acquisition of ownership right by the assessee because the reading of the agreement as a whole and not in bits and pieces would make it crystal clear that the assessee had acquired only right to use and not ownership right. In this connection, he relied on the decision in Kirloskar Pneumatic Co. Ltd. vs. CIT (1982) 136 ITR 746 (Bom), Triveni Engg. Works Ltd vs. CIT (1982) 136 ITR 340 (Del), Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del), CIT vs. Avery India Ltd. (1994) 207 ITR 813 (Cal), Bajaj Tempo Ltd. vs. CIT (1994) 207 ITR 1017 (Bom) and Alembic Chemical Works Co. Ltd. vs. CIT (supra).
12. Finally, therefore the learned Accountant Member held that the said expenditure of Rs. 16,42,205 was allowable as revenue expenditure under s. 37(1) of the IT Act for the asst. yr. 1986-87 covered under the present appeal.
13. In his dissenting note the learned Judicial Member expressed his firm view that s. 35AB covers both capital and revenue expenditure incurred for acquiring technical know-how. In this connection, referred to the absence of the clause "being in the nature of capital expenditure" in s. 35AB, which had been used in s. 35A and s. 35ABB indicating that ss. 35A and 35ABB were applicable to capital expenditure. He then reproduced s. 35AB and observed that perusal of the same showed that three conditions had been laid down for allowing claim under s. 35AB, namely :
(i) assessee should pay any lump sum consideration;
(ii) for acquiring any know-how; and
(iii) such know-how should be for use for the purpose of a business.
14. As regards condition (1) above, the learned Judicial Member observed that under the agreement the assessee had agreed to pay a lump sum amount of Rs. 16,42,205 for acquiring technical know-how. As regards condition (ii) above, he discussed the meaning of "for acquiring" with reference to the meaning of the word 'acquire' as given in dictionaries and in the context of the provision of the agreement and then held that the assessee had acquired ownership right of the technical know-how. He observed that the assessee was not required to return the technical datas, drawings, etc. after 8 years and in fact the assessee continued to use the same even after expiry of 8 years and it had not returned the same. Thus condition (ii) above was also fulfilled in the case. He further held that since the assessee had paid part of the consideration for acquiring technical know-how in the year under consideration the last requirement, i.e., condition (iii) above was also fulfilled in the case. He, therefore, held that the expenditure in question squarely fell within the purview of s. 35AB of the Act.
15. The learned Judicial Member also examined s. 37(1) and observed that the words in bracket "[not being expenditure of the nature prescribed in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee]" were significant because ss. 30 to 36 have been excluded from s. 37(1) which is treated as residuary section. Considering the above, and decisions in CIT vs. High Land Produce Co. Ltd. (1976) 102 ITR 803 (Ker), CIT vs. Carborundum Universal Ltd. (1977) 110 ITR 621 (Mad), Nathmal Bankatlal Parikh & Co. vs. CIT (1980) 122 ITR 168 (AP) and Chenab Forest Co. vs. CIT (1974) 96 ITR 568 (J&K), he held that it was clear that once any expenditure is covered under ss. 30 to 36 that shall not be the subject-matter of allowability under s. 37(1). Since the claim of the assessee was covered under s. 35AB, as held by him, the same had to be disposed of under s. 35AB and not under s. 37(1). He added that the facts of the case decided by Calcutta Bench of Tribunal in Wellman Incandescent India Ltd. vs. CIT (supra) referred to by the learned Accountant Member above, is quite different and moreover the Calcutta Bench decided the issue without considering the words in bracket [in s. 37(1), referred to above], which excluded expenditure covered under ss. 30 to 36 from the scope of s. 37(1).
16. In the above view of the matter, the learned Judicial Member concurred with the AO that the expenditure of Rs. 16,42,205 was to be considered under s. 35AB and not under s. 37(1) of the IT Act. Thus, there was difference between the learned Accountant Member and learned Judicial Member on the issue of allowability of the claim of Rs. 16,42,205 under s. 37(1) or under s. 35AB. As discussed above, the learned Accountant Member is of the view that the entire claim was allowable under s. 37(1) in the assessment year covered under the present appeal, whereas the learned Judicial Member is of the view that only 1/6th of the first instalment of Rs. 3,19,768 made in the year 1985 was allowable to the assessee under s. 35AB as was done by the AO in this case.
17. The appeal was fixed for hearing before me as Third Member in the case. The learned authorised representatives of both the sides made their respective submissions. The learned authorised representative of the assessee submitted that the impugned expenditure was incurred for obtaining the right to use technical know-how and it did not result in acquisition of any capital asset. He added that the perusal of the agreement would show that (i) the assessee was already engaged in manufacture of automobile tyres and the present agreement was entered into for obtaining know-how to manufacture radial passenger tyres; (ii) the assessee had been granted non-exclusive right and licence to use technical know-how for manufacture of radial passenger tyres (Ref. Art. 2); (iii) the agreement was for a period of 8 years and could be terminated at any time by a written notice in the event of any default by the concerned parties and on termination of the agreement, all rights and licences granted to the assessee shall be terminated (ref. Art. 6); (iv) in the event of any future discovery whether patentable, patented or unpatentable, relating to the processing methods, formula, or an improvement thereof by the assessee shall vest with Goodyear, USA and cannot be assigned or otherwise parted with without prior consent of Goodyear (USA) (ref. Art. 8); any right or interest in the agreement was intended to benefit exclusively the assessee and could not be assigned by either party without prior consent of the other party. (ref. Art. 13); (vi) during the continuance of the agreement and for additional period of seven years thereafter the technical data made available by Goodyear (USA) was to be held in confidence and could not be divulged without written consent to any person (ref. Art. 7).
18. The learned authorised representative of the assessee further submitted that the technical know-how agreement with Goodyear (USA) provided a non-exclusive right in licence to use know-how in the manufacture of radial passenger tyres. The agreement shall be in effect for a period of 8 years until terminated by either party. He contended that under the agreement the assessee only acquired the right to use the know-how to manufacture new product in the same line of business which neither resulted in advantage of enduring benefit in the capital field nor in the creation or of any asset and hence the expenditure was allowable as revenue expenditure in full. He relied on various decisions as under :
(i) Ciba India Ltd.'s case (supra);
(ii) Shriram Refrigeration Industries Ltd.'s case (supra);
(iii) Triveni Engg. Works Ltd.'s case (supra);
(iv) Addl. CIT vs. Shama Engine Valves Ltd. (1982) 138 ITR 216 (Del);
(v) CIT vs. Bhai Sunder Dass & Sons (P) Ltd. (1986) 158 ITR 195 (Del);
(vi) CIT vs. British India Corpn. Ltd. (1987) 165 ITR 51 (SC);
(vii) Avery India Ltd.'s case (supra);
(viii) Alembic Chemical Works Co. Ltd.'s case (supra);
(ix) Bajaj Tempo Ltd. vs. CIT (1994) 207 ITR 1017 (Bom);
(x) CIT vs. Madras Rubber Factory Ltd. (1995) 212 ITR 442 (Mad);
(xi) CIT vs. Suhrid Geigy Ltd.;
(xii) CIT vs. Madras Rubber Factory Ltd. (1983) 144 ITR 678 (Mad);
(xiii) CIT vs. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC);
(xiv) CIT vs. I.A.E.C. (Pumps) Ltd. (1998) 232 ITR 316 (SC);
(xv) CIT vs. Wavin (India) Ltd. (1999) 236 ITR 314 (SC);
(xvi) S.R.P. Tools Ltd. vs. CIT (1999) 237 ITR 684 (Mad);
(xvii) IAC vs. Rollatainers Ltd. (1988) 30 TTJ (Del) 59 : (1987) 23 ITD 440 (Del);
(xviii) IAC vs. Bajaj Tempo Ltd. (1996) 55 TTJ (Pune)(SB) 43 : (1996) 218 ITR (AT) 147 (Pune)(SB); and (xix) Voltas Ltd. vs. Dy. CIT (1998) 64 ITD 232 (Mumbai).
19. He further submitted that in the asst. yr. 1984-85 in the assessee' own case the Tribunal while holding the payment of technical know-how fee for manufacture of extra large Goodyear tyre as revenue expenditure had observed that the agreement was not meant for the manufacture of an entirely new product. The consideration was paid for the improvement of the product in question and the assessee only enlarged the range of existing product. The inclusion of the range of extra large OTR tyres was consistent with the profit-making apparatus of the assessee-company and the expenditure was laid out as part of the process of profit earning. He contended that in view of such finding of the Tribunal in asst. yr. 1984-85 the similar expenditure in the assessment year in question for the manufacture of radial tyres was eligible for deduction as revenue expenditure.
20. The learned authorised representative of the assessee further submitted that s. 35AB of the Act provided for amortisation of lump sum consideration paid for acquiring any know-how for use for the purpose of the assessee's business. The said section does not cover a case where there is no right to use the technical know-how without any acquisition of the same. He added that the term "acquiring" mentioned in s. 35AB refers to absolute proprietary rights in know-how as opposed to obtaining mere right to use. He then explained the meaning of the word "acquire" as given in the Shorter Oxford Dictionary and the Black's Law Dictionary, and the meaning of the word "acquisition" as given in Bouvier's Law Dictionary (Third Edn. at p. 114). The Law Lexicon Dictionary (2nd Edn. pp. 34-35) and contended that the meaning of the word "acquire" and "acquisition" as given in the aforesaid dictionaries clearly showed that it referred to acquisition of proprietary/ownership right and not right to use only.
21. The learned authorised representative then referred to the Supreme Court's decision in the case of Charanjit Lal vs. Union of India AIR 1951 SC 41 and submitted that the meaning of "acquisition" as given by the Supreme Court in this case also made it clear that acquisition referred to acquisition of the entire interest of the previous holder by transfer of title i.e., of ownership right. He also referred to Supreme Court's decision in the case Devidas Gopal Krishan vs. State of Punjab AIR 1967 SC 1895 wherein also it was held that acquisition meant acquisition of ownership right by transfer. The learned authorised representative then referred to several other cases in Citizen Watch Co. Ltd. vs. IAC (1984) 148 ITR 774 (Kar), CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal), Graphite Vicarb India Ltd. vs. ITO (1992) 43 ITD 28 (Cal) (SB), Swadeshi Polytex Ltd. vs. ITO (1991) 38 ITD 328 (Del) and DCM Ltd. vs. ITO (1989) 29 ITD 123 (Del) in support of his contention.
22. The learned authorised representative of the assessee then referred to the Tribunal, Calcutta Bench order in the case of Wellman incandescent (India) vs. Dy. CIT (supra) wherein it was held that s. 35AB of the Act does not cover a case where there is only a right to use the technical know-how without acquisition of the same. Reliance was also placed on the decision of the Tribunal, Delhi Bench order in the case of Polar Electrotech Ltd. vs. Dy. CIT (1997) 94 Taxman (Del) 314.
23. He further submitted that s. 35AB is an incentive provision of enable amortisation of expenditure on acquisition of know-how which is otherwise capital expenditure in nature. He referred to the Finance Minister's Budget Speech of the financial year 1985 and the Memorandum explaining the provisions of Finance Bill, 1985 relating to introduction s. 35AB.
24. He further submitted that the assessee being entitled to claim deduction of revenue expenditure incurred for use of technical know-how would be put to disadvantage if the expenditure is to be amortised as per s. 35AB over a period of six years, which was otherwise allowable as revenue expenditure. In such circumstances there could not be any incentive to the assessee and the expressed intent of the legislature would be defeated. He added that s. 35AB was not intended to supersede the existing provisions allowing deduction of revenue expenditure. In this context, he also referred to the CBDT Circular No. 56, dated 19th March, 1971 regarding the provisions of s. 35D of the Act. He added that ss. 37(1) and 35AB were mutually exclusive and not dependent on each other. He contended that even if the expenditure on obtaining right to use the technical know-how was allowable as deduction under both the provisions of the Act the deduction more beneficial to the assessee should be allowed in the case. Reliance was placed on Supreme Court's decision in the case of CIT vs. Indian Engg. & Commercial Corpn. (P) Ltd. (1993) 201 ITR 723 (SC) and CIT vs. Continental Construction Ltd. (1998) 230 ITR 485 (SC).
25. The learned authorised representative of the assessee further submitted that the decision of the Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 224 ITR 342 (SC) relied upon by the Revenue is distinguishable on facts. In the present assessee's case the agreement provided for a limited right to use of know-how and licence to manufacture radial passenger tyres for 8 years. But in the case of Jonas Woodhead & Sons (India) Ltd. vs. CIT (supra) on the facts of that case 25 per cent of the expenditure in obtaining the technical know-how was held by the Supreme Court to be capital in nature in view of the finding of the High Court that under the agreement what was set up by the assessee was a new business and the foreign firm had not only furnished information and technical know-how but rendered valuable services in setting up of the factory it self, and after expiry of the agreement the assessee was free to manufacture the product. He added that in the following decisions after considering the case of Jonas Woodhead & Sons (India) Ltd. (supra) the expenditure on obtaining right to use technical know-how was held to be an allowable deduction :
(i) Kirloskar Tractors Ltd. vs. CIT (supra) - At pp. 77 to 83 of the paper book;
(ii) CIT vs. Simpson & Co. Ltd. (1999) 103 Taxman 102 (Mad) - pp. 86 to 90 of the paper book;
(iii) CIT vs. Revathi C.P. Equipment Ltd. (1999) 105 Taxman 641 (Mad);
(iv) By the Delhi Bench of the Tribunal in the appellant's case for the asst. yr. 1984-85; and
(v) S.R.P. Tools Ltd. vs. CIT (supra).
26. The learned authorised representative finally submitted that the impugned expenditure had been incurred for obtaining the right to use technical know-how and non-exclusive licence for manufacture of radial passenger tyres for a limited period and not for acquisition of the said know-how and, therefore, the conditions in s. 35AB of the Act were not fulfilled in the case and hence the impugned expenditure was allowable as deduction under s. 37(1) of the Act.
27. The learned authorised representative further submitted that even if s. 35AB were to be held as applicable, 1/6th of the amount of question was allowable as deduction and not only 1/6th of the first instalment of the amount in question paid in 1985, as was done by the AO in this case. In this connection he referred to s. 43(2) of the Act, which defines the term "paid" to mean to amount actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession". He added that an amount for which the liability is accrued though not due/payment not actually made is to be regarded as paid for the purposes of the Act. Reliance was placed on the Supreme Court's decision in Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC), Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC) and several other decisions of High Court.
28. Finally the learned authorised representative of the assessee supported the view of the learned Accountant Member.
29. The learned Senior Departmental Representative appearing for the Department on the other hand supported the orders of the authorities below as well as the view of the learned Judicial Member. He submitted that two issues were to be decided in this case. Firstly, whether the payment in question was of capital nature or revenue nature and secondly if it was revenue expenditure, then, whether it was hit by the provisions of s. 35AB. In support of his stand that the expenditure in question was a capital expenditure and not revenue expenditure, the learned Senior Departmental Representative placed reliance on Supreme Court's decisions in the case of Southern Switchgear Ltd. vs. CIT (1998) 232 ITR 359 (SC) and Jonas Woodhead & Sons (India) Ltd. (supra). He submitted that the nature of the technical assistance to be provided to Goodyear (USA) was not mere chemical composition but it included transferring technical data, technical development, plans, specifications, designs, secret manufacturing process, etc. In this connection, he referred to Art. 3 and Art. 1 of the agreement for technical assistance. He therefore, argued that the assessee had acquired valuable capital asset under the said agreement and as such the consideration paid for the same was capital expenditure.
30. The learned Senior Departmental Representative then referred to article of the agreement and pointed out that the payments for the technical know-how were of two types, namely, lump sum payment of US $ 96,000 equivalent to Rs. 16,42,205 and royalty equal to 2 per cent of the turnover. He added that the lump sum payment was for technical know-how, drawing designs, documentation, execution on commissioning which were all of capital nature as they gave enduring benefit to the assessee being essential for the purpose of production itself. He contended that duration of 8 years given in the agreement was not a serious limitation as in the case of Southern Switchgears Ltd. and Jonas Woodhead & Sons (India) Ltd. (supra). Even in these cases the duration was 10 years. He also referred to Art. 13 of the agreement and submitted that this was very important as this bound Goodyear (USA) not to assign the technical know-how to any other party other than the assessee.
31. The learned Senior Departmental Representative submitted that the facts of the case of CIT vs. Wavin India Ltd. (supra) relied upon by the assessee, were distinguishable inasmuch as in that case the assessee had contributed to the cost of research conducted by foreign company, whereas in the case of the present assessee there was lump sum payment for technical know-how already with the foreign company. He added that the lump sum amount paid by the present assessee for the technical know-how was clearly of capital nature. Thus, he concluded that the expenditure in question being of capital nature, was not allowable under s. 37(1) as a revenue expenditure.
32. The learned Senior Departmental Representative submitted that even if it were to held that the expenditure in question was revenue expenditure and not capital expenditure, the same could not be allowed as a deduction in the assessment year in question, as was claimed by the assessee because the provisions of s. 35AB were attracted in the case and accordingly only 1/6th of the first instalment of the amount paid in 1985 relevant to the assessment in question was allowable as deduction. He supported the view of the learned Judicial Member that s. 35AB was applicable both in the case of revenue expenditure and capital expenditure. In this connection, he referred to the words in the bracket under s. 37(1) as "(not being expenditure of the nature described in ss. 30 to 36 and not being the nature of capital expenditure or personal expenses of the assessee)" and then argued that since the impugned expenditure was covered under s. 35AB, it was excluded from the purview of s. 37(1). He, therefore, added that the expenditure in question was not allowable under s. 37(1) because the same was covered under s. 35AB. He further added that the conditions required under s. 35AB were all fulfilled in the case as had been discussed at length in the dissenting note of the learned Judicial Member.
33. The learned Senior Departmental Representative submitted that the CBDT Circular No. 56, dated 19th March, 1971 regarding the provisions of s. 35AB, referred to by the learned authorised representative of the assessee, was not relevant in the present case because the issue here was different and not the same as under the provisions of s. 35D. He also submitted that the reference by the learned authorised representative of the assessee to various decided cases relating to Expln. 2 to s. 9(1)(vi) was not relevant because in those cases the issue was taxability in the hands of foreign company and not allowability of expenses as it is in the present case.
34. The learned Senior Departmental Representative submitted that the submission of the learned authorised representative that in the alternative to the claim of full deduction of the expenditure as revenue expenditure in the assessment year in question, 1/6th of the total expenditure should be allowed under s. 35AB and not only 1/6th of the first instalment of the total amount paid during the period relevant to the assessment year in question was not fit to be accepted. He added that the entire among of Rs. 16,42,205 had neither become accrued nor due nor was it paid during the period relevant to the assessment year in question and therefore, the provisions of s. 43(2) were not applicable in favour of the assessee. He further added that as per the agreement only the first instalment of $ 32,000 had become due to be paid and had actually been paid by the assessee during the period relevant to the assessment year in question and, therefore, the AO was correct in allowing 1/6 of the said amount under s. 35AB.
35. The learned Senior Departmental Representative further submitted that without prejudice to the aforesaid propositions made by him in case it were to be held that the expenditure was allowable under s. 37(1), the deduction should be allowed at 1/8th of the lump sum amount in question because the agreement for use of the technical know-how was for 8 years. Reliance was placed on Tribunal Mumbai Bench decision in the case R. V. Pandit vs. Asstt. CIT (1999) 64 TTJ (Mumbai) 529 : (1999) 70 ITD 1 (Mumbai) decided in the light of Supreme Court's decision in the case of Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 225 ITR 802 (SC).
36. The learned Senior Departmental Representative made a second alternative submission in the case. He submitted that one aspect of the case, which was not discussed by the learned Accountant Member was that the terms of the agreement did not require the assessee to pay the $ 96,000 in one go. The agreement required the assessee to pay in three instalments as under :
(a) First 1/3rd after the agreement has been taken on record.
(b) Second 1/3rd on delivery of technical documentation.
(c) 3rd and final 1/3rd on commencing of commercial production or 4 years after the agreement is taken on record.
37. He, therefore, contended that as per the terms of the agreement only the first instalment had accrued and fallen due during the previous year relevant to the assessment year in question and, therefore, the assessee could not claim deduction of the remaining two instalments also in the assessment year in question.
38. The learned authorised representative of the assessee in reply to the submission of the learned Senior Departmental Representative submitted that the claim of the total lump sum amount in the assessment year in question was proper and justified and the learned Senior Departmental Representative's contention that in the alternative the same should be allowed in 8 years or three years in accordance with the aforesaid provisions of the agreement, was not correct. He argued that the entire lump sum amount had become accrued in view of the agreement. He further submitted that this point raised by the learned Departmental Representative was beyond the question referred for decision by the Third Member and, therefore, the same could not be considered by Third Member.
39. I have gone through the proposed order of the learned Accountant Member, the dissenting note of the learned Judicial Member and the materials on the file. I have also carefully considered the submissions and contentions of the rival parties. In order to answer the question referred to for my opinion as Third Member the following issues have to be considered and decided in the case, namely :
(i) whether the said expenditure was a revenue or capital expenditure; and
(ii) whether section 35AB is applicable to both proposed capital expenditure and revenue expenditure.
40. To decide the first issue, I would like first to examine the terms and conditions of the agreement between the assessee and the Goodyear (USA) regarding the transfer of the technical know-how for the production of radial tyres and then to see whether the technical know-how was obtained for manufacturing a new product in a new business or it was for assessee's existing business of tyre manufacturing and also to determine from the expenditure in question whether the assessee acquired enduring benefit. The agreement was made and entered into as on 1st December, 1984 to provide for the transfer of technical information and assistance for manufacture of radial tyres under the terms and conditions contained therein. The previous year relevant to asst. yr. 1986-87 covered under the present appeal was calendar year ending 31st December, 1985. The title of Art. 2 of the agreement is "Grant of licence by Goodyear". It provides as under :
"Article 2 - Grant of licence by Goodyear Goodyear grants to Goodyear-India for the period and upon the terms and conditions hereinafter set forth a non-exclusive right and licence to use, in connection with the development, manufacture use, maintenance, operation, testing and improvement of the covered products in India, and in connection with the sale of the covered products world-wide, the technical data made available to Goodyear-India pursuant to this agreement."
41. Perusal of the above article makes it clear that the agreement was for licence and not for sale and the transfer of the technology was transfer for its use and the return and it was not transfer on sale. Again perusal of art. 1(b), Art. 3, Arts. 6.1, 6.2, 6.3 and ..... 7.1 would also support this view. Article 1(b) and Art. 3 provide as under :
"Article 1-Definitions The following definition shall be applicable for all purposes of this agreement :
(a) ** ** **
(b) "Technical Data" shall mean technological developments, plans, specifications, designs, secret manufacturing processes, formulae, bills of material and similar data relating to the development, manufacture, testing, servicing, maintenance operation and improvement of the covered products, which at any time during the term hereof are owned by Goodyear."
"Article 3 - Technical Assistance During the term hereof, Goodyear will furnish to Goodyear-India, upon request, such technical data as Goodyear-India may reasonably require in connection with the development, manufacture, use, maintenance, operation, testing and improvement of the covered products."
42. The above articles also show that the agreement was not for transfer of fixed technical data, plans, designs, etc. on the date of agreement but, the agreement was for providing such data, plans, designs, etc., which at any time during the terms thereof are owned by Goodyear on a continuing basis which the assessee may reasonably require in connection with the development, manufacture, use, maintenance, operation, testing and improvement of the covered products."
Articles 6.1, 6.2 and 6.3 provide as under :
"Article 6 - Duration and termination of this agreement 6.1 Unless sooner terminated by mutual agreement of the parties or as hereinafter provided, this agreement shall be in effect for a period of eight (8) years from the date the agreement is taken on record.
6.2 Goodyear shall have the right, at its option, to terminate this agreement at any time by written notice to Goodyear-India in the event
(i) of failure of Goodyear-India to pay, when due, any amount owing by it under this agreement, -
(ii) of expropriation, nationalisation, intervention, seizure, sequestration, or de facto, control, directly or indirectly, of the business or any property or rights of Goodyear-India by authority or perported authority of any Governmental, millitary, political, or other instrumentality, or (iii) that Goodyear shall cease to have, or to be able to exercise the exclusive right to nominate and elect a controlling majority of the members of the Board of Directors of Goodyear-India.
6.3 Additionally, either party hereto shall have the right, at its option, to terminate this agreement at any time by written notice to the other party in the event (i) of default by the other party in the performance of any obligation on its part to be performed under this agreement, if the defaulting party has failed to remedy such default within sixty (60) days after written notice requiring remedial action, or (ii) of the insolvency or bankruptcy of the other party, or the placing of its business in the hands of a receiver, trustee, custodian or liquidator."
The above article also makes it clear that the agreement was not for transfer of ownership of the technical data, plans, designs, etc. but it was for transfer and licensing for use and return of the same. The ownership of the same continued to be with Goodyear, USA and the assessee had got only right to use under licence for fixed term of 8 years.
Article 7.1 - Provides as under :
"7.1.Goodyear - India agrees that, during the continuance of this agreement and for an additional period of seven (7) years thereafter, all technical data made available to it by Goodyear will be held in confidence and will not be divulged by Goodyear-India without the written consent of Goodyear, to any person, firm, corporation, establishment, Government or Governmental agency, except responsible employees and Goodyear-India for use in its business. Goodyear-India shall take all reasonable steps to insure compliance therewith by Goodyear-India's employees."
43. The above article also makes it clear that the technical data, plans, designs, etc. provided to the assessee continued to remain the property of Goodyear, USA and they were not sold to the assessee. Thus, from the perusal and construction of the terms of the agreement, it is clear that the assessee had not acquired ownership rights over the technical datas, plans, designs, etc. obtained from Goodyear, USA and the right that it had acquired under the agreement was confined to their use for manufacturing of radial tyres for the fixed term. In view of the above discussions, I hold that it was not a case of sale of the technical know-how by Goodyear, USA to the assessee but it was a case of transfer for use under the licence and thus, the assessee had not acquired ownership of the said technology.
44. The next aspect of the first issue, i.e., whether the expenditure in question was a revenue or capital expenditure, is whether the technical know-how was obtained for manufacturing a new product. In this connection, it is to be noted that the assessee had already been manufacturing tyres and that in asst. yr. 1984-85 the Tribunal while holding the payment of technical know-how fee for manufacture of extra large OTR tyres as revenue expenditure, observed that the agreement was not made for the manufacture of an entirely new products, and the consideration was made for argument and enlargement of the existing product of the existing business. It was neither a new product nor a new business. I would agree with the learned Accountant Member that the agreement considered in the asst. yr. 1984-85 did not have any significant difference with the present agreement relevant for asst. yr. 1986-87 and, therefore, the Tribunal's decision in asst. yr. 1984-85 in the assessee's own case should be treated as applicable for the assessment year covered under the present appeal. I would also agree with the learned Accountant Member that the Hon'ble Supreme Court decision in Ciba of India Ltd.'s case (supra) and Alembic Chemical Works Ltd.'s case (supra) relied upon by the Tribunal in appeal for asst. yr. 1984-85 covered under the present appeal. On the facts and in the circumstances of the case, I support the following finding of the learned Accountant Member given in para 16.3 p. 35 of the order reproduced hereunder :
"16.3 It may also be relevant here to mention that the activity of manufacture of radial tyres did not require any separate or additional plant and machinery. It only needed a different chemical composition. Such, activity was a part of the same business, as there was a common fund, common management, common plant & machinery for manufacture of the improved quality of tyres, namely, radial tyres."
45. The last aspect of the first issue to be considered is whether the expenditure resulted in acquiring advantage of any asset of enduring benefit to the assessee. From the above discussion about the nature and terms of the agreement, it became clear that the assessee had not acquired any asset as such but it had acquired only the right to use for a limited period. There was also no absolute certainty of its continued use for the business for a long period because of existence of the terms of the agreement for its termination even before 8 years. The assessee had not acquired any advantage in capital field. The advantage consisted merely of facilitating the assessee's manufacturing and trading operation to be carried on more profitably while leaving other capital untouched. Moreover, every enduring advantage is not of capital nature. The Supreme Court's decision in Empire Jute Co. Ltd.'s case (supra) makes this position very clear. Again in these days of fast changing world of technology the advantage under the agreement could not be considered as advantage of enduring nature. The following observations of Bombay High Court in Bajaj Tempo Ltd.'s case (supra) supports this view :
"We are unable to accept that this proposition applies to the assessee's case. This is so, because we are unable to read the assessee's agreement with the German company as an agreement the predominant purpose of which was to render mere documentation service. As pointed in Kirloskar Pneumatic's case (1982) 136 ITR 746 (Bom), it is not possible to scan a contract in bits and pieces to determine its nature, not by referring to a particular clause. As we read the agreement of the assessee with the German company, the predominant object of the agreement was to render technical know-how to the assessee. In relation to the main purpose, one of the incidental object was to transfer the designs, data sheets and such other technical documents. We are unable to accept the agreement of Mr. Jetley that the agreement in question, when read in its entirety, should be held to be an agreement mainly for the purpose of supply of documents. When the true purpose of the agreement is discovered there is no difficulty in applying the ratio of the judgments of this Court in CIT vs. Tata Engg. & Locomotive Co. (P) Ltd. (1980) 123 ITR 538 (Bom) and Kirloskar Pnuematic's case. We are of the view that the agreement was predominantly an agreement for purchase of technical knowledge or information. By expending money thereon, the assessee can neither be said to have brought into existence any asset, or at any rate and asset of an enduring nature. We cannot lose sight of the observations of the Supreme Court made in CIT vs. Ciba of India (1968) 69 ITR 692 (SC) and Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC) that in these days of fast changing world of technology, the frontiers of scientific and technical knowledge shift rapidly, and what is current today may become obsolete in no time. The thread of reasoning which runs from Ciba's case (supra) to Alembic's case (supra) and through the several judgments of our High Court noticed by us, supports the view that the state-of-the-art technology of modern times can neither be deemed to be permanent nor of an enduring nature, so as to satisfy the 'enduring asset' test".
46. The Hon'ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. (supra) has held as under :
"Held (i) that the payment of Rs. 2,39,084 under art. VI(a) was in the nature of revenue expenditure. The while object of agreement was only to obtain the benefit of technical assistance for running the business, a restricted licence for the limited use of the patent rights of Westinghouse and the use was restricted to the assessee alone and for the duration of the agreement of such technical information as may be supplied by Estinghouse. In the light of these features of the agreement it could be appropriately said that Estinghouse did not part with technical knowledge absolutely in favour of the assessee and that technical knowledge absolutely in favour of the assessee and that Westinghouse had not "sold" their secret processes to the assessee. The period of the agreement was not of much significance.
If the nature of the agreement itself was such that it could not be said that the assessee had absolutely acquired any knowledge or asset, it was difficult to see how even a payment made by way of a lump sum to obtain the agreement or to persuade Westinghouse to enter into the agreement could itself have a different character. Further since the payments were made to have access to the knowledge and information that was necessary to carry on and run the business from day-to-day, it was not of much significance whether the agreement was entered into at the time of commencement of a business or in the course of a business which was already being carried on.
If the collaboration agreement results in the absolute transfer of technical knowledge to the assessee, the assessee could be said to have acquired an asset or enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payment cannot be elevated to the status of payments of a capital nature."
47. The Hon'ble Supreme Court in the case of Alembic Chemicals Works Co. Ltd. (supra), inter alia, held as under. The relevant extracts from the head-note are reproduced hereunder :
"(ii) That there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the appellant's existing plant had become obsolete or inappropriate in relation to the explanation of the new sub-cultures of the high yielding strains supplied by Meiji. The mere improvement in or updating of the fermentation-process would not necessarily be inconsistent with the relevant and continuing utility of the existing infrastructure, machinery and plant of the appellant.
(iii) That the limitations placed in the agreement on the right of the appellant in dealing with the know-how and the conditions as to non-partibility, confidentially and secrecy of the know-how pertained more to the use of the know-how than to its exclusive acquisition.
(iv) That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business venture. The further circumstances that the agreement pertained to a product already in the line of the appellant's established business and not to new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as deduction in computing the business profits of the appellant.
By the Court : (i) "It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make up a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.
The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of sufficient degree of durability appropriate to the context."
48. In the light of the above discussions, I endorse the view of the learned Accountant Member that the lump sum amount of Rs. 16,42,205 was a revenue expenditure. In para 16.10 the learned Accountant Member has given his final view about this, which I reproduce below with my endorsement :
"16.10 In the present case, the assessee obtained right to use the technical know-how for manufacturing of radial tyres, which was meant for improvisation in the process and technology for manufacture of tyres. It was a part of the existing line of business. The agreement provided the conditions as to non-transferability to others without the permission of the foreign company, it also contained clauses relating to confidentiality and secrecy of know-how, it contained prohibition for user of the know-how upon termination of the agreement. It only provided a licence to the assessee to use such technical know-how for a limited period as provided in the agreement. The reading of the agreement as a whole in the light of the aforesaid judgments of the Hon'ble apex Court, Hon'ble Jurisdictional High Court and other judgments referred above, would make it crystal clear that the expenditure incurred by the assessee by way of lump sum consideration payable for obtaining technical know-how, etc. for manufacture of radial tyres is clearly allowable as revenue expenditure."
49. The learned Judicial Member in his note did not differ with the learned Accountant Member in the view that the expenditure in question was a revenue expenditure. In fact, he supported his view that it was a revenue expenditure by citing several decisions like those of Supreme Court in Empire Jute Co. Ltd.'s case (supra) and Alembic Chemical Works Co. Ltd.'s case (supra), Jonas Woodhead & Sons (India) Ltd.'s case (supra), of Delhi High Court in the case of Triveni Engg. Works Ltd.'s case (supra), Shama Engine Valves Ltd.'s case (supra), etc. He, however, added that these decisions of allowability of payment of consideration for right to use of technical know-how were given before the introduction of s. 35AB with effect from asst. yr. 1986-87 and, therefore, according to him, these decisions were not relevant in the case.
50. Now the next issue to be decided in this case, is whether s. 35AB was applicable to the expenditure in question even if it was a revenue expenditure. The point of difference between the learned Accountant Member and learned Judicial Member arose here. When learned Accountant Member was of the view that s. 35AB was not applicable to revenue expenditure, which was in any case, allowable under s. 37(1) of the Act the learned Judicial Member was of the view that s. 35AB was applicable to a lump sum payments for technical know-how be it revenue expenditure or capital expenditure. Sec. 35AB(1) provides as under :
"Sec. 35AB(1) subject to the provisions of sub-s. (2), where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purpose of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments of each of the five immediately succeeding previous years."
51. No doubt, the use of the words "in lump sum consideration for acquiring know-how" and the absence of words like "expenditure of a capital nature" in the above provisions which have been used in ss. 35A and 35ABB give prima facie impression that the view of the learned Judicial Member is correct but the issue is not that simple. The provisions of s. 35AB have to be understood in the light of the scheme of the IT Act and other relevant provisions. As rightly observed by the learned Accountant Member, that no non obstante clause like "Notwithstanding contrary contained in any other provisions of the Act" or "Notwithstanding anything contained in sub-s. (1) of s. 37" has been used in s. 35AB which would mean that it does not override sub-s. (1) of s. 37, under which the revenue expenditure is allowable as deduction in full. Again, the learned Accountant Member rightly observed that s. 35AB is an enabling as well as incentive section, which allows deduction of lump sum payment for technical know-how in six equal instalments, i.e., 1/6th for six years. How can it be said to be an enabling and incentive section, if it brings within its mischief a revenue expenditure also which is allowable in full in the relevant year under s. 37(1) of the Act. Therefore, the interpretation that s. 35AB is applicable both to capital expenditure and revenue expenditure will defeat the very purpose of s. 35AB and the legislative intent of introducing this section as vividly brought out in Finance Minister's speech and Memorandum explaining the said provision. The Supreme Court judgment in the case of CIT vs. Shahzada Nand & Sons (1966) 60 ITR 392 (SC), referred to by the learned Accountant Member is clearly supportive of this view. The relevant extract of this judgment is reproduced by the learned Accountant Member, is given below :
"The doctrine, generalia specialibus non-derogant, embodies a rule of construction, but it has universal application. To invoke it, the general and special provisions should occupy the same field.
In a taxing Act one has to look merely at what is clearly stated, and in a case of reasonable doubt the construction must beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the Court as to what is just or expedient. The expressed intention must guide the Court."
52. The learned Accountant Member also very appropriately referred to the Supreme Court's judgment in the case of Bajaj Tempo Ltd. (supra). The relevant extract of this judgment as reproduced by the learned Accountant Member, is also given below :
"Sec. 15C of the Indian IT Act, 1922 read as a whole, is a provision directed towards encouraging industrialisation by permitting an assessee setting up a new industrial undertaking to claim relief from tax to the extent of tax on six per cent of the capital employed every year. But the legislature took care to restrict such benefit only to those undertakings which were new in form and substance, by providing that the undertaking should not be "formed" in any manner provided in cl. (i) of s. 15C(2). By that clause, the legislature intended to control any attempt or effort to abuse the benefit intended for new undertakings by changing of label. The intention was not to deny the benefit to genuine new industrial undertakings but to control the mischief which might have otherwise taken place. Adopting a literal construction would result in defeating the very purpose of s. 15C. Therefore, it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful.
53. A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provisions and not to frustrate it.
54. The learned Accountant Member also very appropriately referred to the Tribunal, Calcutta's Bench decision in the case of Wellman Incandescent India Ltd. (supra). It was held in this case that the assessee's right to have deduction in respect of payments made for obtaining the use of technical know-how allowable as revenue expenditure under s. 37 remained unaffected by new s. 35AB introduced with effect from asst. yr. 1986-87. Sec. 35AB is an enabling section and not disabling or prohibitive one and, therefore, it should be held to be applicable to that consideration paid for acquiring technical know-how, which would otherwise be disallowable as being of capital account.
55. The clause "for acquiring any know-how for use for the purposes of his business" appearing in s. 35AB has also been subject of differing interpretation by the learned Accountant Member and the learned Judicial Member. While, the learned Accountant Member was of the view that the words "for acquiring" here meant acquiring the know-how as owner thereof and as such s. 35AB was applicable to a case of acquiring the know-how as owner thereof and not to a case where the know-how was acquired merely for use and ownership thereof remained with its, licenser. He, therefore, held that s. 35AB was not applicable to the present case. The learned Judicial Member, on the other hand, held the view that the condition imposed by the aforesaid clause "for acquiring any know-how for use for the purposes of his business" was fulfilled in the case because the assessee had under the agreement obtained all the rights of owner inasmuch as it had been using the technology even after the expiry of the term 8 years and had not returned the technical datas, plans, etc. to Goodyear, USA.
56. I have given careful consideration to the aforesaid different views of the learned Accountant Member and the learned Judicial Member and have also carefully considered the submissions made by the learned authorised representatives of both the parties in dispute on this issue. I am inclined to endorse the view of the learned Accountant Member. The view of the learned Judicial Member is not consistent with the terms of the agreement as discussed above. I have already held above after referring to various articles of the agreement that the transfer of the technical know-how by Goodyear. USA to the assessee was not a case of sale and transfer of ownership but it was a transfer on licence for use for a limited period of 8 years. The finding of the learned Judicial Member that the assessee had acquired ownership rights, with due respect, was contrary to the facts of the case and hence was not correct.
57. Even if it is held for argument's sake that s. 35AB covers within its ambit both for acquiring on capital account as well as acquiring on revenue account, even then the assessee will be entitled to claim deduction under s. 37(1) or s. 35AB, whichever is beneficial to him because both the sections are not mutually exclusive and both exist simultaneously, as discussed at length herein before. The learned Accountant Member referred to the judgment of the Supreme Court in the case of Indian Engg. & Commercial Corpn. (P) Ltd. (supra) and Continental Construction Ltd. (supra) in support of this view. The following observations of the Supreme Court in the case of Continental Construction Ltd. (supra), quoted by the learned Accountant Member is reproduced below for the sake of emphasis and charity on the point :
"Originally, s. 40(c) contained sub-cl. (iii) dealing with expenditure which results directly or indirectly in the provisions of any remuneration or benefit or amenity to a employee. The expenditure on employees is now removed from s. 40(c) and incorporated in s. 40A(5). The two s. 40(c) and 40A(5) are, however, not mutually exclusive. In s. 40(c), the proviso, for example, refers to a case where the director (or a person who has a substantial interest in the company or a relative of the director or of such person) is also an employee of the company for any period prescribed in the previous year. In that situation expenditure of the nature referred to in cls. (i), (ii), (iii) and (iv) of the second proviso to cl. (a) of s. 40A(5) shall not be taken into account for the purpose of calculating the ceiling under s. 40(c) of the Act. It has been held that in the case of directors who are also employees, both these sections will be attracted and the higher of the two ceilings has to be applied CIT vs. Indian Engineering & Commercial Corporation (1993) 201 ITR 723 (SC). If for the purpose of ceiling on expenditure, both ss. 40(c) and 40A(5) are to be applied to employee-directors, there is no reason why for the purpose of deciding what is to be excluded from the expenditure subject to such ceiling, both the sections cannot be taken into account. Both sections constitute a composite scheme. For determining the ceiling, the higher ceiling has to be taken into account. Similarly, for determining permissible expenditure which is outside the ceiling limit also, both the sections will have to be applied."
58. The learned Judicial Member in his dissenting note has referred to the words in bracket s. 37(1) i.e., "(not being expenditure of the nature described in ss. 30 to 36 and not in the nature of capital expenditure or personal expenses of the assessee)" and held that these words debarred by the assessee from deduction of the expenditure under s. 37(1). I have already discussed and given my opinion above that the expenditure is not covered under s. 35AB and that it was not a capital expenditure. It was neither a personal expenditure of the assessee. Hence the aforesaid words in bracket were not applicable to the present case and the assessee was not debarred from getting deduction under s. 37(1) of the Act. I have also already held above that the legislative intent of introducing s. 35AB was to give incentive and not to deny or reduce deduction already admissible under the existing provisions of s. 37(1) of the Act. On the facts and in the circumstances of the case as above, therefore, I would like to go with the learned Accountant Member in his broad view and not with the learned Judicial Member in the narrow view of the matter. Accordingly, I would hold that the expenditure of Rs. 16,42,205 was allowable under s. 37(1) of the IT Act.
59. Now I would like to deal with a question not covered by the aforesaid question, referred for my opinion, i.e., whether the entire expenditure was allowable under s. 37(1) in the asst. yr. 1986-87. In this connection, I have considered the rival submissions before me including the rival contentions on whether this new point can be considered by a Third Member. I am of the considered opinion that as this point is important and arising from the materials on record, and as the Tribunal is a final fact-finding authority, it cannot be overlooked. The interest of justice and fair play demands that when a fact had come to notice before conclusion of a case, it must be duly considered and appropriately decided.
60. Let me examine the point with reference to the terms of the agreement and the provisions of the IT Act. Art. 4.1(a) is the relevant article regarding payment of the lump sum consideration in question. It provides as under :
"Article 4 - Payments 4.1 In consideration for the costs and expenses incurred by Goodyear to prepare and provide Technical Data to Goodyear India on a continuing basis, Goodyear-India agrees to pay Goodyear the following payments during the term of this agreement :
(a) A lump sum amounting to Ninety-six thousand United States Dollars (US $96,000) subject to applicable Indian taxes. Such tax liability shall be borne by Goodyear-India. The subject payment shall be for technical know-how, drawings, designs, documentation, execution and commissioning etc. The lump sum shall be paid in three instalments as detailed below :
(i) First one-third after the agreement has been taken on record.
(ii) Second one-third on delivery of technical documentation.
(iii) Third and Final one-third on the commencement of commercial production or four years after the agreement is taken on record, whichever is earlier."
61. It will be seen from the above that the lump sum amount was payable in three equal instalments and each of the three instalments was payable on the happening of specific event. As for example, the first instalment was payable after the agreement had been taken on record. The second instalment was payable on delivery of technical documentation and the third and last instalment was payable on the commencement of commercial production or four years after the agreement was taken on record, whichever is earlier. From the facts on record it appears that the events on which second and third instalments were payable had not taken place during the previous year relevant to the assessment year in question and hence the amount of second and third instalment had neither become accrued nor due nor payable nor was it paid. Clearly, therefore, the assessee was not entitled to deduction of total amount and it was entitled to deduction of the amount of first instalment only. In view of the clear term of the agreement, as reproduced above, the matter was so clear that there is no need to refer the various judgments on what is accrual, due or payable. The assessee by claiming deduction for the total amount in this assessment year itself, was trying to defer the payment of tax in this year on the excess deduction claimed, which was quite substantial as besides tax of several lakhs of rupees, it was liable to interest, etc. under the provisions of the Act. Deferment of tax is wilfully practised by large number of assessees of which strict view has to be taken to deter them from such wrong practices. Therefore, the issue may be addressed by the Division Bench or by a Special Bench in the case as may be considered necessary.